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BUSINESS   ADMINISTRATION 


The  texts  listed  on  this  page  form  the  basic  material  for  the  organ- 
ized Business  Administration  Course  and  service  of  the  LaSalle 
Extension  University.  They  constitute  a  library  of  standard 
practice  in  all  the  important  divisions  of  business  management. 


Titles 
BUSINESS  PSYCHOLOQY 

PERSONAL  EFFICIENCY,  AP- 
PLIED SALESMANSHIP, 
AND  SALES  ADMINISTRA- 
TION   ...... 


A  uthors 
Hugo  Munsterberg,  Ph.D.,  M.D.,  LL.D. 

Harvard  University 


BUSINESS  LAW  I       .     . 

BUSINESS  LAW  II     .     . 

BUSINESS  ENGLISH       . 

BUSINESS  ECONOMICS 

INDUSTRIAL  ORGANIZA- 
TION  AND   MANAGEMENT 

AMERICAN  BANKING  .      .      . 

INVESTMENTS   AND   SPECU- 
LATION      

ORGANIZING  A  BUSINESS     . 

FINANCING  A  BUSINESS  .      . 

ADVERTISING 

RETAIL  MERCHANDISING     . 


CREDITS  AND  COLLEC- 
TIONS  


RAILWAY  REGULATION 

OCEAN  TRAFFIC  AND 
TRADE      


PRINCIPLES    OF    ACCOUNT- 
ING       

OFFICE  ORGANIZATION  AND 
MANAGEMENT       .... 


Irving  R.  Allen 

Sales  Counselor 

Samuel  D.  Hirschl,  S.B.,  J.D. 

Member  of  the  Illinois  Bar 

Edwin  Herbert  Lewis,  Ph.D.,  LL.D. 

Lewis  Institute,  Chicago 

Ernest  Ludlow  Bogart  Ph.D. 

University  of  Illinois 

Hugo  Diemer,  M.E. 

Pennsylvania  State  College 

Henry  Parker  Willis,  Ph.D. 

Secretary,  Federal  Reserve  Board 

Louis  Guenther 

Editor,  "Financial  World" 

Maurice  H.  Robinson,  Ph.D. 

University  of  Illinois 

Elmer  H.  Youngman 

Editor  "Bankers  Magazine" 

E.  H.  Kastor 

H.  W.  Kastor  b-  Sons 

Paul  Nystrom,  Ph.  D. 

United  Stales  Rubber  Co. 

Edward  M.  Skinner 

Manager,  Wilson  Bros. 

R.  S.  White 

.4  merican  Steel  6*  Wire  Co. 

H.  E.  Kramer 

I.  L.  Sharfman,  A.B.,  LL.B. 

University  of  Michigan 

B.  Olney  Hough 

Editor,  "American  Exporter" 

Stephen  Gilman,  B.  Sc.,  C.P.A. 


C.  C.  Parsons 

Manager,  Shaw-Walker  Co. 


LASALLE  EXTENSION  UNIVERSITY 


CREDITS  AND  COLLECTIONS 


CREDITS 

EDWARD  M.  SKINNER 

General  Manager,  Wilson  Bros.;  Formerly  President, 
Chicago  Association  of  Commerce 


COLLECTIONS 

R.  S.  WHITE 

Credit  and  Collection  Manager,  American  Steel  &  Wire  Company 


INSTALMENT  COLLECTIONS 

H.  E.   KRAMER 

Mail  Collection  Expert  and  Counselor 


La  Salle  Extension  University 
-     C  hi  c  a  gf  o 

1920 


Copyright,  1916 
LaSallk  Extension  University 


cs^ 


60 

si 


01 


^  PREFACE  TO  CREDITS 

,cc  It  is  extraordinary,  but  true,  that  business  is  the  only 
profession  which  men  can  enter  without  previously  pre- 
^  paring  themselves.  A  man  cannot  become  a  doctor,  a 
^  lawyer,  an  architect,  he  cannot  become  even  a  stonema- 
"^  son  or  a  hodcarrier  without  preparation,  but  he  can 
f^.^  always  go  into  business  no  matter  how  inadequately  pre- 
^  pared  he  may  be  in  the  science  of  business.  This  fact 
probably  accounts  for  the  great  number  of  failures  in 
business. 

It  is  because  there  are  so  many  failures  in  business 
that  the  credit  man  has  become  a  prominent  figure  in 
commercial  life.  It  is  his  duty  to  safeguard  his  firm 
against  losses  due  to  failures.  Up  to  a  comparatively 
short  time  ago,  few  credit  men  thought  of  themselves  as 
sales-promoters.  They  were  content  to  exercise  a  purely 
destructive  function. 

Within  the  last  few  years  a  remarkable  change  has 
been  noted,  and  the  credit  man  who  is  not  constructive 
is  now  out  of  date.  By  a  constructive  credit  man  I  mean 
one  who  is  a  sales-builder  and  a  profit-maker. 

A  credit  man  may  be  constructive  in  many  ways,  but 
principally  by  helping  those  customers  whose  failure  to 
prosper  is  due  to  lack  of  capital  or  lack  of  knowledge 
about  business  science.  The  first  he  can  aid  by  judicious 
extension  of  credit,  while  the  second  can  be  helped  by 
being  taught  modern  business  methods. 

ill 


iv  Preface 

The  credit  man  who  has  sufficient  insight  and  nerve  to 
put  a  worthy  but  struggling  business  on  the  road  to  pros- 
perity, wins  for  his  house  a  steadfast  friend  and  profit- 
able customer  in  later  years. 

"While  a  discussion  of  this  kind  must,  of  necessity,  deal 
\\nth  the  critical  and  restrictive  work  of  the  credit  man, 
it  has,  as  its  chief  object,  the  exposition  of  constructive 
methods  and  policies.  It  is  written  with  practical  expe- 
rience as  a  basis,  but  its  ultimate  ideal  has  been  to  state 
fundamental  principles  rather  than  to  describe  any  par- 
ticular "system"  of  credit  management  which  would  be 
inapplicable  to  the  reader's  own  situation,  however  prac- 
ticable it  might  be  in  any  other  organization. 

The  ability  to  do  certain  things,  and  the  ability  to  dem- 
onstrate or  teach  the  accomplishment  to  others,  are 
rarely  found  in  the  same  individual,  especially  if  he  be 
a  business  man  and  the  instruction  be  in  writing. 

Added  to  this  is  the  inabihty  of  the  busy  business  man 
to  find  the  time  necessary  to  a  proper  presentation,  in 
any  considerable  detail,  of  anj^  important  subject. 

I  would  not  have  attempted,  nor  possibly  have  felt 
competent  for,  this  work  had  I  not  the  opportunity  of 
collaborating  with  Mr.  Stephen  Oilman,  who  has  done 
most  of  the  work,  and  who  is  entitled  to  whatever  of 
"credit"  you  may  find  herein. 

Mr.  Oilman  is  unusually  well  qualified  to  do  this  piece 
of  work.  He  is  a  graduate  of  the  University  of  Wis- 
consin, in  which  his  father.  Professor  S.  W.  Oilman,  is 
Dean  of  the  Course  in  Commerce.  He  has,  in  addition  to 
this  thorough  university  training,  the  practical  experi- 
ence which  has  come  to  him  as  Manager  of  the  Credit 
Department  of  the  Tennessee  Coal,  Iron  &  Railroad 
Company. 

Edward  M.  Skinner 


PREFACE  TO  COLLECTIONS 

In  preparing  this  treatise  on  Collections  no  effort  has 
been  made  to  tell  the  reader  how  to  collect  an  account 
against  Smith,  Jones  &  Company,  general  merchants, 
Podunk;  or  against  Mary  Martin,  stenographer,  1427 
Walnut  Street.  Rather,  an  effort  has  been  made  to  out- 
line the  entire  collection  problem  as  a  whole  and  to  state 
and  suggest  such  points  and  applications  in  the  analysis 
of  this  great  problem  as  will  enable  the  student  of  collec- 
tion procedure  to  fit,  apply,  and  amplify  the  principles 
developed  to  the  solution  of  any  individual  case. 

The  examples  given  are  not  intended  as  forms  to  be 
used  in  cases  more  or  less  similar,  but  as  illustrations  of 
routine  and  of  the  development  of  increasing  pressure. 

It  is  taken  for  granted  that  the  reader  already  knows, 
or  will  inform  himself,  of  the  existence  of  laws  relating 
to  notes,  accounts,  and  other  evidences  of  debt,  to 
security,  and  in  a  general  way  to  the  processes  and 
application  of  such  laws.  Being  a  business  man,  he 
should  realize  that  the  application  of  law  is  technical 
and  that  he  should  employ  a  lawyer  whenever  legal 
process  must  be  considered.  For  these  reasons,  the 
chapter  on  Legal  Process  has  been  limited  to  a  prepara- 
tion for  legal  action  when  necessary  and  to  warnings 
against  the  undesirable  in  lawyers  and  in  the  law  and 
its  application. 

If  the  study  of  these  pages  develops  facility  in  recog- 
nizing the  real  problems  and  correctly  solving  them,  the 
author  will  consider  himself  amply  repaid  for  the  effort 
and  inconvenience  incident  to  their  preparation. 

R.  S.  White. 


CONTENTS 

CREDITS 

I.    Mercantile  Credit 

Character 2 

Ability  2 

Capital 5 

The  Nature  of  Credit 5 

Kind  of  Credit 7 

II.    The  Credit  Man 

Knowledge  of  Human  Nature 11 

Honesty   12 

Knowledge  of  Accounts  and  Customers 12 

A  Good  Correspondent 13 

Tests  of  a  Good  Credit  Man 14 

III.     The  Sources  of  Credit  Information 

Mercantile  Agencies 15 

Rating    17 

Rating  Books 17 

Special  Reports 18 

Miscellaneous  Services 20 

Quasi-Public  Services  of  These  Agencies 20 

Value  of  Agency  Ratings  and  Reports 21 

Minor  Mercantile  Agencies 21 

Banks 22 

Commercial  Paper  Brokers 23 

Local  Business  Houses 24 

Lawyers  26 

Collection  Agencies 29 

Credit  Associations 30 

The  National  Association  of  Credit  Men 31 

Salesmen    35 

Financial   Manuals,    Periodicals,    and   Reporting 

Services   38 

Trade  Papers  39 

vii 


viii  Contents 

The  Customer 39 

The  Signed  Statement 42 

Conclusion 44 

IV.    Handling  Credit  Information 

Classification  of  Sources 48 

Compariso-n  of  Credit  Factors 48 

Credit  Files 51 

Classification  by  Customers 51 

Classification  of  Information 52 

Record  of  Past  Dealings 54 

Miscellaneous  Files 54 

Relation  of  Credit  to  Other  Departments 55 

V.    Using  the  Information 

Terms  of  Sale 58 

Rules  Concerning  Time  59 

Analysis  of  Character 65 

Analysis  of  Ability 66 

Analysis  of  Capital 67 

Analysis  and  Importance  of  Sales  and  Expense . .   74 

Sales  and  Expenses 76 

Determining  a  Customer's  Credit 78 

Statistics  of  Failures 79 

Economic  Considerations  82 

Legal  Considerations 83 

Promptness  of  Payments 84 

Credit  Cards 85 

VI.    An  Ili/UStbation  of  Actual  Procedure 

The  Inquiry   89 

The  Inquiry  Card 91 

The  Credit  File 94 

The  Index  Card 96 

Handling  Information 97 

Assigning  Terms   101 

Keeping  Information  Alive 102 

Functions  of  the  Inquiry  Card 104 

Summary  of  Credit-Granting  Procedure 104 

VII.     Conclusions 107 


Contents  ix 

COLLECTIONS 

I,     Collections  and  the  Colleotor 

Nature  of  Collections Ill 

The  Collector's  Task    112 

The  Collector's  Qualifications .114 

Belation  of  Collections  to  Other  Departments. . .  .114 

II.    Psychology  of  Collections 

Mental  State  When  Debt  Was  Incurred 118 

Mental  States  After  Debt  Is  Incurred 119 

The  Collector's  Mental  Attitude 120 

III.  Basis  for  the  Debt 

Debts  for  Merchandise 122 

Debts  for  Equipment 123 

Debts  for  Business  Expense 123 

Debts  for  Personal  Expenses  123 

Debts  for  Capital  Outlay 123 

Foundation  for  Collection 124 

IV.  Terms 

Their  Meaning  125 

Clear  Definition 125 

Actual  Practice 126 

V.    Form  of  the  Debt 

Secured  Accounts 129 

Notes 132 

Secured  Notes 134 

Personal  Security 134 

Collateral 135 

Mortgage  136 

Possession  of  Mortgaged  Property 137 

Extensions 138 

VI.    Rights  of  Creditors 

Fundamental  Rights 140 

Modifications 140 

VII,     Environment 

Seasons 144 

Financial  Condition   144 


X  Contents 

VIII.     Collecting  Commercial  Accounts 

Wliolesale  Accounts 147 

Classification  of  Accounts 148 

Discount  Accounts    148 

Prompt-Payment  Accounts  150 

Difficult  Accounts — Slow  But  Good 150 

The  Bad  Account 152 

IX.     Collecting  Slow  Accounts 

Initial  Procedure 155 

Record  and  Tickler  for  Folio w-Up 155 

Correspondence  Files .  158 

Daily  Collection  Routine 158 

Sight  Drafts 160 

Exceptions  to  the  Use  of  Drafts 163 

Collection  Correspondence — First  Steps 163 

General  Principles 164 

Collector's  Attitude 165 

X.     Actual  Procedure  and  Practice 

Statement 166 

Draft 166 

Subsequent  Correspondence 168 

Personal  Call 173 

Co-operation  of  Collectors  and  Salesmen 177 

Retail  Accounts 178 

Inducements — Knacks — Tricks 180 

XT.     Co-operative  Collections 

Object 183 

Avoid  Receivership  and  Bankruptcy 183 

Elements  of  Successful  Co-operative  Collections.  .185 

XII.     Collections  by  Legal  Process 

Suit  on  the  Debt 187 

Bankruptcy  Proceedings 187 

Legal  Precautions 189 

XTII.     Collection  Agencies 

Reason  for  Existence 191 

Methods  of  Work 191 

Fees  Charged  by  These  Agencies 192 

Nature  of  Their  Services 192 


Contents  xi 

Precautions  in  Employing  Agencies 193 

Personal  Adjustment  Services 195 

XIV.     Conclusion 199 

MAIL-ORDER  INSTALMENT  COLLECTIONS 

I.    Fundamental   Principles   of   Mail-Order   Instal- 
ment Accounts 

Their  Place  in  Modem  Merchandising 202 

Pre-Aecount  Information 204 

Personality  of  the  Debtor 205 

Individual  Attention  Extremely  Difficult 206 

Three  Factors  in  Instalment  Collection 207 

Attitude  of  the  Debtor .208 

II.     Typical  Instalment  Collection  Cases 

An  Account  for  Luxuries 210 

An  Account  for  Necessities 226 

A  Woman 's  Account 228 

A  Business  Man's  Account 230 

III.  Psychology  of  the  Instalment  Debtor 

Abusive  Letters 232 

Extensions 234 

The  Debtor's  Viewpoint 237 

Writing  to  the  Chief 238 

Good  Intentions  240 

IV,  Special  Collection  Devices 

Drafts  242 

Legal  Pitfalls 244 

The  Collection  Agency 246 

Collections  by  Attorneys 248 

Form-Letters 251 

V.    The  Mechanics  of  the  Instalment  Collection  De- 
partment 

System  Required 257 

The  Card  System   259 

The  Filing  System 259 

The  Follow-Up  Mechanism  260 


CREDITS 

CHAPTER  I 

MEBCANTHiE    CREDIT 

There  is  no  factor  in  modern  business  that  cuts  a  larger 
figure  than  does  mercantile  credit.  The  prosperity  of  the 
world  is  based  upon  it.  Do  away  with  it  and  you  do  away 
with  the  very  foundation  of  our  social  and  economic 
fabric.  And  yet,  when  we  try  to  explain  the  meaning  of 
the  word  itself,  we  find  the  task  a  difiicult  one.  No  two 
writers  on  this  subject  agree  on  the  terms  they  employ  in 
defining  it. 

But  we  can,  as  a  matter  of  fact,  gain  a  more  adequate 
conception  of  what  credit  really  is  from  example  than 
from  definition.  Let  us,  then,  select  and  discuss  two 
simple  credit  transactions.  These  transactions  will 
typify  the  two  great  classes  of  actual  transactions  which 
exist  in  modern  business  life.  By  analyzing  them  in  this 
simple  form  we  can  arrive  at  the  laws  which  govern  mer- 
cantile credit.  This  is  the  method  that  the  scientist  uses 
when  he  studies  in  his  laboratory.  He  reproduces  on  a 
small  scale  and  in  a  simple  form  the  things  that  he  finds 
in  nature,  and,  inasmuch  as  his  experiments  are  under  his 
direct  control,  he  can  vary  conditions  to  suit  himself.  Let 
us  consider  in  this  same  way  the  two  following  situations : 

Example  I. — Smith  has  for  sale  30  tons  of  coal  at  $3  per  ton. 
Brown  knows  that  if  he  had  that  much  coal  he  could  retail  it  and 
make  a  profit  of  50  cents  per  ton.    He  has  no  money  to  buy  the 

1 


2  Credits 

coal  from  Smith,  but  finds  that  Smith  is  willing  to  sell  it  to  him 
in  return  for  his  promise  to  pay  at  the  end  of  30  days.  He  there- 
fore buys  the  coal  on  this  arrangement  and  retails  it  to  thirty  of 
his  customers,  one  ton  to  each  customer  at  $3.50  per  ton.  He 
then  collects  in  full  from  each  of  these  customers,  the  total  col- 
lections amounting  to  $105.  Then  he  pays  Smith  $3  for  each  ton 
of  coal  purchased,  or  $90  altogether,  which  leaves  him  $15  profit. 

Chakacteb 

Smith  has  extended  credit  to  Brown  for  30  tons  of  coal. 

Let  ns  analyze  this  transaction  in  detail.  Why  should 
Smith  let  Brown  have  30  tons  of  coal  when  Brown  had  no 
money  with  which  to  pay  for  it?  Obviously  it  must  be 
because  he  feels  sure  that  Brown  will  pay  for  it  in  30  days, 
as  he  has  promised.  This  means  that  he  can  rely  on 
Brown's  promise.  Here  we  have  the  first  of  the  three 
important  elements  in  any  extension  of  credit.  This  first 
element  is  known  as  ** character."  Bro"\vn's  diaracter  is 
so  good  that  Smith  knows  that  he  will  keep  any  promise 
he  makes,  if  possible. 

Ability 

The  two  words  "if  possible"  lead  us  to  consider  the 
second  vital  element  in  the  credit  transaction,  namely, 
' '  ability. ' '  Smith  evidently  knows  Brown,  and  knows  his 
ability  is  of  a  high  order.  He  knows  that  Brown  is  a 
capable  man  and  a  good  business  man  and  that  if  he  says 
he  can  sell  the  coal  at  a  profit  he  probably  can.  Brown 
might  have  an  excellent  character,  but,  if  his  ability  was 
poor,  it  is  not  likely  that  Smith  would  let  him  have  the 
coal  merely  upon  his  promise  to  pay  for  it  at  the  end  of 
30  days.  The  promise  might  be  honestly  made,  and  yet, 
lacking  ability,  Bro\vn  might  find  it  impossible  to  pay  as 
he  had  agreed  to. 


Mercantile  Credit  3 

Character  and  ability,  then,  are  the  two  all-important 
elements  in  this  transaction. 

In  the  first  transaction  the  material  which  was  sold  was 
coal.  The  same  principles  which  apply  to  this  sale  of 
coal  will  also  apply  to  the  sale  of  any  merchandise.  We 
can  now  follow  Brown's  fortunes  farther  and  study  a 
different  kind  of  transaction. 

Example  II. — We  saw  that  in  the  first  illustration  Brown  prof- 
ited to  the  extent  of  $15  on  one  transaction.  Let  us  assume  that 
when  he  has  repeated  his  operation  ten  times  and  has  built  up  a 
business,  the  elements  of  which  consist  of  purchases  from  Smith 
based  merely  on  promises  to  pay,  and  sales  to  customers  at  an 
advanced  price,  he  finds  that  he  can  conduct  this  business  more 
efficiently  if  he  has  a  horse  and  wagon  with  which  to  deliver  the 
fuel.  Green  has  a  horse  and  wagon  for  sale  for  $300  and  trans- 
fers it  to  Brown  in  return  for  his  promise  to  pay  in  30  days. 
Brown  hks  only  $150,  his  profits  on  the  ten  previous  transactions, 
and  he  does  not  wish,  as  in  the  first  example,  to  sell  the  property 
in  order  to  get  funds  with  which  to  pay  for  it.    What  can  he  do  ? 

He  can  pay  Green  $150,  which  he  has  on  hand,  and  ask  him  to 
wait  for  the  balance  until  another  $150  iu  profits  has  been  earned, 
or  he  can  go  to  a  money  lender,  borrow  $150,  giving  the  money 
lender,  as  security,  a  mortgage  on  the  horse  and  wagon,  to  be 
paid  off  in  small  instalments,  and,  adding  $150  of  his  own  money, 
pay  $300  to  Green,  thus  clearing  his  debt.  This  leaves  Brown 
with  a  horse  and  wagon,  which  are  mortgaged  for  $150  but  which 
are  worth  $300,  and  no  cash  at  all. 

In  this  second  example,  Green  extended  credit  to 
Brown.  He  sold  him  a  horse  and  wagon  entirely  on 
Brown's  promise  to  pay  for  it  in  30  days.  It  is  clear  that 
the  element  of  character  that  we  noted  in  the  first  example 
is  also  present  here.  Green  had  confidence  that  Brown 
would  keep  his  promise  to  pay ;  also  Green  must  have  had 
confidence  in  Brown's  business   ability.     He  felt  that 


4  Credits 

Brown  would  not  buy  a  horse  and  wagon  unless  it  was  a 
wise  and  profitable  thing  to  do.  Thus  we  see  that  the  same 
two  essential  elements,  namely,  character  and  ability,  are 
present  in  the  two  situations. 

There  is,  however,  a  fundamental  difference.  In  the 
first  example.  Brown  bought  the  coal  to  sell  it  at  a  profit. 
There  was  no  permanent  investment  involved.  To  all 
intents  and  purposes.  Brown  acted  only  as  a  connecting 
link  between  Smith  and  the  thirty  customers.  If  we 
assume  that  Brown  was  honest  and  able,  there  was  no 
need  for  liim  to  have  capital.  In  the  second  illustration, 
the  horse  and  wagon  were  not  bought  for  purposes  of 
resale,  but  for  an  investment.  Green  is  not  sure  of  getting 
his  money  back  as  promptly  as  Smith  was.  The  time 
factor  becomes  an  important  one.  Green,  however,  is 
better  secured  than  Smith  was,  as  the  property  he  sold 
Brown  was  not  consumed  or  resold,  but  was  kept  on  hand 
and  could  under  certain  conditions,  by  recourse  to  law, 
be  seized  by  Green  in  payment  of  the  debt.  You  will  note 
that  the  question  of  capital  as  one  of  the  factors  in  credit 
has  not  been  considered  in  this  example. 

The  two  situations  that  have  been  explained  are  simple 
types  of  transactions  that  are  taking  place  in  countless 
numbers  everj'^  day.  When  the  grocer  sells  you  provisions, 
when  the  electric  light  company  sells  you  current,  when 
the  oil  man  sells  you  kerosene,  the  same  situation  is 
involved  as  in  Smith 's  sale  to  Brown.  When  you  buy  fur- 
niture, an  automobile,  or  a  house  and  lot,  the  transaction 
is  in  no  way  different  from  that  between  Brown  and  Green, 
except  that  both  of  the  cases  used  for  illustration  were 
simple  and  ''ideal"  ones,  stripped  of  all  complicating  and 
nonessential  incidents.  Furthermore,  we  paid  no  heed  to 
credit  factors  which  were  of  the  ''external"  variety. 


Mercantile  Credit  5 

Capital 

The  thoughtful  student  will  see  that  even  if  a  man  has 
good  character  and  is  possessed  of  excellent  ability,  there 
is  still  some  element  of  risk  in  selling  him  goods  merely 
on  his  promise  to  pay.  Suppose,  for  instance,  that  before 
Brown  is  able  to  sell  the  coal  which  he  has  received  from 
Smith,  it  should  become  ignited  and  be  entirely  burned 
up.  Brown  would  have  no  money  with  which  to  reimburse 
Smith  for  the  coal.  Or  suppose,  in  the  second  illustration, 
that  the  horse  which  Brown  purchased  from  Green  should 
become  ill  and  die.  Brown  would  be  unable  to  pay  Green 
what  he  owed  him.  Suppose,  however,  that  Brown  had 
capital  amounting  to  $1,000.  His  capital  might  be  so 
invested  that  he  could  not  utilize  even  a  portion  of  it  to 
pay  Smith  for  the  coal  before  it  was  delivered.  Smith, 
however,  would  be  far  more  willing  to  trust  Brown  for 
the  coal  because  of  the  $1,000  which  he  knew  that  Brown 
possessed.  The  coal  could  burn  up,  and  still  Brown  would 
be  able  to  pay  Smith.  The  horse  could  die,  and  still  Brown 
would  be  able  to  pay  Green. 

Capital,  then,  acts  as  a  form  of  insurance  against  the 
unexpected.  If  it  were  possible  for  Brown  to  insure  the 
coal  that  he  purchased  from  Smith  against  fire  and  every 
other  conceivable  form  of  loss  with  some  reliable  insur- 
ance company,  the  effect  would  be  the  same  as  if  he  had 
capital. 

The  Natube  of  Ceedit 

We  can  now  summarize  our  results  as  follows :  When 
a  man  or  a  corporation  secures  at  the  present  time  goods, 
services,  or  money  for  which  an  equivalent  is  to  be 
rendered  at  some  future  time,  credit  is  present.  It  has 
been  defined  as  ''the  permission  to  use  another's  capital" 


6  Credits 

or  as  "the  measure  of  one  person's  reliance  on  another 
person's  promise  to  pay."  It  can  hardly  be  a  measure 
of  anji;hing  except  in  the  way  that  actual  money  may  be 
defined  as  a  measure.  The  function  which  money  usually 
exercises  is  exercised  by  credit. 

From  another  point  of  view,  credit  is  just  the  opposite 
of  cash.  The  customer  who  pays  cash  utilizes  profits 
already  accrued,  while  he  who  uses  credit  anticipates  the 
profits  of  the  future. 

Whenever  credit  is  extended,  the  giver  of  credit  either 
consciously  or  unconsciously  recognizes  the  essential 
elements  which  we  have  explained,  namely,  character  and 
ability,  and  also  certain  external  factors  which  may  be,  at 
least  partially,  guarded  against  by  capital.  It  is  custom- 
ary for  writers  on  this  subject  to  think  of  the  three 
elements  together,  inferring  that  they  are  of  the  same 
nature.  Character  and  ability  are  of  the  same  nature, 
both  being  personal  qualities,  but,  as  we  have  stated, 
capital  is  not  a  personal  thing ;  in  reality,  it  merely  acts 
as  insurance  against  the  unexpected. 

A  man  is  ''worth"  exactly  the  cash  value  of  his  assets : 
his  ' '  credit ' '  is  measured  by  his  power  to  borrow  monej'^ 
and  his  abihty  to  buy  on  time.  It  is  readily  seen  that 
the  figures  standing  for  a  man's  credit  and  for  his  net 
solvency  seldom  agree.  For,  while  the  first  reckons  the 
range  of  trust  accorded  him  as  a  business  man,  the  other 
represents  an  entirely  impersonal  purchasing  power, 
which  can  be  stated  in  exact  units.  In  other  words,  cash 
is  independent  of  personality,  whereas  credit  never  is. 
The  possession  of  money  would  qualify  an  idiot  for 
purchasing  at  the  market  price,  but  he  could  lay  no  claim 
to  credit,  and  his  power  to  buy  would  stop  with  the 
exhaustion  of  his  means  for  paj'ing. 

It  is  true,  however,  that  in  credit-granting  one  man's 


Mercantile  Credit  7 

cash  capital  may  not  be  so  good  as  another's.  If  two  men, 
each  with  $1,000,  should  solicit  credit  from  a  good  credit 
man,  the  first  question  each  would  be  asked  is:  ''Where 
did  you  get  this  capital  ? ' '  The  applicant  who  had  earned 
his  $1,000  by  his  own  efforts  would  be  entitled  to,  and 
would  probably  receive,  from  two  to  four  times  more 
credit  than  would  the  man  who  had  acquired  his  $1,000 
by  inheritance  or  gift. 

Why? 

Just  because  the  first  man  has  demonstrated  his  ability 
in  a  tangible  way.  The  other  man  has  simply  been  fortu- 
nate, and  may  not  know  how  to  care  for  his  money  or  how 
to  make  it  grow. 

Kind  of  Credit 

Mercantile  credit,  represented  by  book  accounts,  bills 
of  exchange,  promissory  notes,  and  other  evidences  of 
indebtedness,  affects  continuously  a  large  number  of 
people,  and  it  has  come  about  that  any  mention  of  credit 
without  qualification  refers  to  the  transfer  of  commod- 
ities, more  particularly  the  selling  by  large  wholesale 
houses  to  retail  dealers.  When  referring  to  other  kinds 
of  credit,  it  has  become  customary  to  mention  the 
particular  kind,  such  as  "personal"  credit,  which  rests 
principally  upon  the  good  faith  of  the  creditor;  "bank- 
ing" credit,  in  which  money  is  the  merchandise  instead 
of  goods;  "public"  credit,  which  refers  to  the  nation,  the 
state,  or  the  municipality;  and  "investment"  credit,  in 
which  money  is  loaned  on  the  basis  of  securities  in  one 
form  or  another. 

The  volume  of  business  daily  transacted  on  a  credit 
basis  is  immense,  so  immense  that  it  impresses  the  least 
careful  observer.  The  activities  of  the  largest  houses 
consist  in  the  selling  of  goods  on  time.    It  is  probably  well 


8  Credits 

within  the  truth  to  assert  that  95  per  cent  of  the  sales 
made  to  retailers  are  credit  sales,  and,  since  this  country's 
volume  of  trade  reaches  into  thousands  of  millions 
annually,  it  is  to  be  seen  what  a  tremendous  power  is 
exercised  by  credit.  Its  two  great  economic  functions  are 
to  promote  the  production  of  wealth  and  to  facilitate  the 
exchange  of  capital.  In  thinking  of  the  enormous  volumes 
of  credit  transactions,  it  is  well  to  remember  that  every 
one  of  them  is,  in  its  elements,  similar  to  one  of  the  two 
illustrations  with  which  we  opened  this  chapter. 

An  illustration  of  the  prime  importance  of  the  two  credit 
factors  occurred  in  Chicago  some  years  ago.  The  vice- 
president  of  one  of  the  large  banks  announced  one  day 
that  he  proposed  to  start  a  national  bank  of  his  own — 
capital,  $1,000,000.  On  that  bare  announcement  the 
capital  stock  was  oversubscribed  four  times.  The  man 
had  no  money  to  speak  of,  but  he  had  a  far-reaching 
reputation  for  integrity  and  ability,  and  by  that  alone  he 
attracted  four  million  dollars. 

TEST  QUESTIONS 

1.  What  is  mercantile  credit? 

2.  What  other  kinds  of  credit  are  there? 

3.  What  are  the  two  fundamental  credit  situations? 

4.  What  are  the  three  basic  credit  factors? 

5.  Are  the  three  credit  factors  alike  in  their  nature  ?    Explain. 


CHAPTER    II 

\ 

THE    CREDIT    MAN 

It  is  clear  that  while  one  transaction  like  that  between 
Smith  and  Brown,  or  even  ten  such  simple  transactions, 
could  be  handled  in  one  day  by  one  man,  where  they  run 
into  the  hundreds  every  day  and  into  the  thousands  each 
year,  special  machinery  is  needed  to  simplify  the  exten- 
sion of  credit,  and  special  training  is  needed  for  the  man 
who  is  in  charge  of  that  department  of  the  business  which 
is  known  as  the  "credit  department." 

In  every  wholesale  house  and  in  every  manufacturing 
company  there  is  one  man  who  occupies  a  position  of 
authority  which  is  unique.  Not  even  his  superiors  can 
afford  to  reverse  his  decisions.  From  them  there  is  no 
appeal.  He  has  the  authority  to  say  who  may  buy  on 
time  and  who  must  purchase  for  cash.  He  is  known  as 
the  ' '  credit  man. ' '  He  sits  in  judgment  on  the  financial 
responsibility  of  customers.  He  may  be  young,  but  his 
experience  has  been  long  and  varied,  since  this  is  neces- 
sary for  the  adequate  discharge  of  his  duties.  He  has  a 
range  of  special  information  and  a  command  of  pertinent 
facts  such  as  no  other  man  in  the  organization  of  his 
company  can  bring  to  bear  in  deciding  a  customer's  trust- 
worthiness. 

This  man  must  be  familiar  with  the  details  of  all  lines 
of  business  in  which  his  debtors  are  engaged,  in  order 
that  he  may  determine  from  the  facts  he  has  before  him, 
whether  or  not  an  applicant's  capital,  sales,  expenses, 

9 


10  Credits 

and  past  experience  are  such  as  to  give  promise  of  ultimate 
success. 

He  must  know  at  least  the  elements  of  commercial  law, 
the  statutes  of  exemption,  the  financial  responsibility 
of  corporation  offices,  and  the  members  of  a  partnership. 
He  should  know  whether  or  not  a  woman  is  a  free  trader. 
He  cannot  be  expected  to  have  a  detailed  knowledge  of  all 
these  facts,  but  there  are  some  fundamentals  that  he 
must  know  in  order  that  he  may  extend  credit  understand- 
ingly.  It  takes  keen  insight  to  fix  at  once  upon  the  vital 
and  decisive  factors  in  the  great  mass  of  credit  material, 
and  sharp  analytical  powers  to  sift  the  kernels  from  the 
chaff  and  to  correlate  the  factors  which  are  to  be  consid- 
ered in  connection  with  one  another. 

The  honesty,  good  habits,  economy,  and  industry  of  a 
debtor,  the  commercial  condition  of  the  locality  in  which 
he  does  business,  his  standing  in  the  community  in  which 
he  lives,  are  just  as  much  a  part  of  his  capital  as  the  cash 
he  has  invested.  They  are  greater  elements  in  his  success. 
The  credit  man,  both  from  his  knowledge  of  what  is 
necessary  for  success  and  from  his  experience  in  dealing 
with  hundreds  of  merchants,  should  be  able  so  to  impress 
the  applicant  for  credit  that  he  will  start  his  business  on 
sound  lines  and  continue  it  on  such  systematic,  well- 
defined  policy  as  has  been  found  successful  in  other  similar 
enterprises. 

The  credit  man  is  the  doctor  of  business.  If  given  an 
opportunity,  he  will  diagnose  the  case  and  recommend 
remedies.  He  will,  if  consulted  in  time,  advise  common- 
sense  treatment  and  will  soon  restore  healthful  conditions 
and  ultimate  prosperity.  Business,  like  the  body,  is 
strong  and  healthy  where  fundamental  conditions  are 
right  and  where  proper  lines  are  followed.  The  ills  of  a 
business  are  much  more  easily  corrected  than  the  ills  of 
the  body  and  mind. 


The  Credit  Man  11 

Then  it  follows  that  under  modem  business  conditions 
debtors  and  creditors  are  in  a  sense  partners  in  enterprise. 
Credit  is  no  longer  given  as  a  favor  to  the  debtor,  but  with 
a  view  to  mutual  profit.  Likewise,  the  old  conception  of  a 
debt  as  a  mere  legal  operation  is  inconsistent  with  the 
theoiy  of  modern  productive  credit.  The  firm  that  extends 
credit  supphes  capital  to  the  debtor  and  assumes  to  a 
certain  degree  proprietary  responsibility  for  the  success 
of  the  latter.  Obviously,  the  credit  man,  as  an  investor  of 
capital,  should  have  a  broad  knowledge  of  credit  affairs. 

Knowledge  of  Human  Natuei, 

As  good  character  is  fundamental  in  all  credit  dealings, 
the  credit  man  must  be  a  student  of  character.  He  must 
have  wide  sympathy  and  be  absolutely  unprejudiced.  The 
credit  man  must  be  able  to  determine  whether  an  applicant 
for  credit,  if  he  is  just  starting  in  business,  has  the 
requisite  qualifications  for  success,  and  if  he  decides 
affirmatively,  he  must  be  willing  to  back  his  judgment  by 
judicious  extension  of  credit,  which  is  nothing  more  nor 
less  than  added  capital  to  the  debtor's  business. 

No  credit  man  can  hope  to  be  successful  today  who  is 
not  tactful.  Tact  is  sympathy  with  other  people,  the  abil- 
ity to  put  oneself  in  the  position  of  another.  The  man 
of  tact  must  have  a  good  memory.  He  must  remember 
people's  weaknesses  and  their  sensitive  spots,  in  order 
to  avoid  them.  He  must  remember  their  interests  and 
their  hobbies,  in  order  to  fraternize  with  them.  He  must 
remember  their  strength  and  their  pride,  in  order  to 
appeal  to  their  vanity.  The  credit  man  should  be  digni- 
fied, but  pleasant  and  agreeable,  in  order  that  he  may 
always  place  his  customers  perfectly  at  ease. 

The  credit  man  has  often  to  ask  and  do  many  things 
which  are  unpleasant  and  embarrassing,  both  for  himself 


12  Credits 

and  for  the  debtor.  If  be  can  do  these  things  in  such  a 
way  as  to  keep  the  good  will  of  his  customer,  even  if  he 
cannot  sell  him,  he  is  a  master  of  diplomacy.  The  greatest 
compliment  a  credit  man  can  receive  is  to  find  that  an 
applicant  who  has  been  declined  credit,  either  buys  for 
cash  or  says  to  him,  "I  will  put  myself  in  such  shape 
that  you  mil  gladly  extend  me  credit. ' ' 

The  credit  man  must  have  broad  human  sympathy.  He 
must  be  able  to  enter  understandingly  into  the  hope  and 
the  ambitions  of  the  applicant.  He  must  never  pennit 
his  judgment  to  be  so  prevailed  upon  that  he  allows  a 
credit  against  his  better  judgment.  This  does  not  mean 
that  a  credit  man's  sympathy  should  be  allowed  to  over- 
ride a  cool,  analytical  judgment.  The  extender  of  credit 
who  lacks  the  human  touch,  however,  makes  a  success 
neither  for  himself  nor  for  his  house. 

Honesty 

Honesty  and  fair  dealing  are  just  as  necessary  to  the 
credit  man  as  to  the  merchant  he  desires  to  sell.  The 
credit  man  should  build  for  himself  a  reputation  for 
honesty  that  wall  make  him  the  confidant,  the  adviser,  ard 
the  helper  of  his  customers.  Such  a  reputation  will 
reflect  favorably  not  only  on  his  house  but  also  on  himself. 
It  will  bring  to  him  mthout  hesitation  men  in  trouble  and 
in  need  of  advice.  The  credit  man's  opportunity  for 
helpfulness  is  not  surpassed  by  that  of  any  other  man  in 
the  business  world,  except,  possibly,  the  banker's. 

Knowledge  of  Accounts  and  Customers 

It  is  necessary  for  the  credit  man  to  keep  in  closest 
touch  with  the  accounts  receivable,  particularly  since  he 
is  often  casliier  and  also  head  bookkeeper  and  general 
oflBce  manager. 


The  Credit  Mem  13 

Since  credit  is  affected  by  every  operation  or  incident 
between  the  customer  and  the  house,  the  credit  man  comes 
in  touch,  or  should  come  in  touch,  with  every  detail,  no 
matter  how  insignificant  it  may  seem,  relating  to  the 
return  of  merchandise,  claims,  cancellation,  requests  for 
donations,  etc.  They  all  have  a  bearing  on  credit.  He 
usually  attends  personally  or  through  his  assistants  to  all 
correspondence  regarding  or  affecting  the  policy  of  the 
house  except  that  concerned  with  the  sale  of  goods,  etc. 
In  this  way,  being  a  sort  of  correspondent,  he  comes  to 
personify  the  custom  and  policy  of  the  house.  To  him 
are  referred  all  matters  pertaining  not  only  to  credit,  but 
also  to  the  hundreds  of  minor  adjustments  that  daily  come 
up  for  decision  in  every  business  and  that  have  much  to  do 
with  satisfying  and  holding  the  customer. 

A   GrOOD    COKRESPONDEKT 

The  old-time  credit  man  used  to  see  customers  at  least 
twice  a  year.  Now  he  rarely  does.  Credit  has  become 
more  a  matter  of  correspondence.  Hence,  the  necessity 
of  the  credit  man's  being  a  good  letter-writer.  A  really 
good  correspondent  will  save  his  firm  many  times  his 
salary  in  good,  unquestionable  credits  or  credits  that  are 
under  careful  investigation.  He  will,  through  his  tactful 
letters,  settle  differences  and  adjust  claims,  satisfy 
customers  as  to  the  correctness  of  policy,  and  thus  hold 
the  customers  of  his  house  satisfied  instead  of  driving 
them  away.  The  more-than-ordinary  credit  man  will 
accordingly  become  proficient  in  the  art  and  science  of 
business  letter- writing. 

The  indispensable  qualifications  of  a  modern  credit 
man  are  that  he  should  have  a  broad  and  comprehensive 
knowledge  of  business  as  a  whole  and  that  he  should  be  a 


14  Credits 

diligent   student   of   human   nature,   accountancy,   and 
correspondence. 

Tests  of  a  Good  Credit  Man 

The  foregoing  qualifications  he  must  have,  but  the 
ultimate  tests  of  a  good  credit  man  are  his  accomplish- 
ments, his  results.    These  tests  may  be  reduced  to  five : 

1.  The  percentage  of  average  annual  losses  to  the  total 
volume  of  yearly  business. 

2.  The  relation  of  the  total  volume  of  business  declined 
for  credit  reasons,  and  that  portion  of  it  which  would 
have  proved  a  loss  if  it  had  been  taken. 

3.  The  accounts  receivable  measured  by  the  average 
number  of  day 's  sales  contained  in  them. 

4.  The  general  office  expense. 

5.  Constructive  policies  rather  than  destructive  ones. 
The  value  and  importance  of  each  test  will  become  more 

apparent  as  we  progress  in  the  study.    It  will  be  necessary 
to  consider  the  work  of  a  credit  man  more  in  detail. 

TEST  QUESTIONS 

1.  Why  is  a  credit  man  needed  in  modern  business  ? 

2.  What  are  the  qualifications  of  a  good  credit  man? 

3.  What  are  the  tests  of  a  good  credit  man? 

4.  Why  cannot  his  superiors  afford  to  reverse  the  credit  man's 
decisions  ? 

5.  In  what  sense  is  the  credit  man  a  "doctor  of  business"? 


CHAPTER  III 

THE    SOURCES    OF   CREDIT   INFORMATION 

In  a  previous  chapter  we  saw  that  before  Smith  could 
judge  whether  it  was  advisable  to  sell  Brown  coal  on 
credit,  he  had  to  know  certain  things  about  him.  When 
we  pass  from  the  simple  transaction,  and  survey  the 
complex  credit  situation  which  has  been  brought  into 
existence  by  modern  business  organization,  we  can  readily 
see  that  it  would  be  impossible  for  any  man  to  know  all 
about  every  customer  his  concern  might  sell  goods  to. 
He  must  have  information,  and  it  must  be  detailed, 
accurate  information. 

Not  only  that,  but  it  must  be  information  of  certain 
specific  kinds.  In  order  to  be  of  any  use  to  the  grantor 
of  credit,  information  regarding  his  proposed  customer 
must  have  to  do  with  the  customer's  (1)  character,  or 
(2)  ability,  or  (3)  net  worth,  otherwise  known  as  capital. 
The  credit  man  who  passes  judgment  on  perhaps  hundreds 
of  doubtful  cases  a  day  must  know  where  to  go  for  his 
information  in  regard  to  them.  Furthermore,  he  must  be 
able  to  get  the  information  quickly.  His  customers  may 
be  touchy  and  may  refuse  to  wait  upon  the  credit  man's 
convenience.  Let  us  then  consider  the  sources  of  credit 
inforniation  and  how  the  modern  credit  man  uses  them. 

Mercantile  Agencies 

There  are  few  engaged  in  any  sort  of  business  who  are 
not  somewhat  informed  regarding  the  two  large  mercan- 

15 


16  Credits 

tile  a^enciee — The  Bradstreet  Company  and  R.  G.  Dun 
&  Company,  usually  called  "Bradstreet"  and  "Dun" 
for  short — and  no  one  expecting  to  start  in  business  can 
escape  their  investigations,  whether  his  operation^  are 
on  a  strictly  cash  basis  or  involve  buying  goods  on  time. 

These  now  gigantic  concerns  originated  about  the 
middle  of  the  preceding  century  in  a  small  local  endeavor 
to  compile  systematically  such  information  regarding 
individuals  as  a  collection  lawyer  would  need  for  the 
handling  of  claims  entrusted  to  him  by  distant  creditors. 
From  an  insignificant  beginning  both  enterprises  have 
grown  to  such  proportions  that  they  now  have  repre- 
sentatives throughout  the  civilized  world,  although  their 
chief  activities  are  confined  to  the  United  States  and 
Canada.  For  this  reason,  it  is  unnecessary^  to  consider 
their  methods  and  procedure  outside  of  English-speaking 
America,  inasmuch  as  limitations  of  space  exclude  a 
consideration  of  export  trade  and  its  credit  problems. 

Whoever  has  buying  or  selling  relations  with  the  public 
is  interviewed  from  time  to  time  by  representatives  of 
Bradstreet  and  Dun  and  requested  to  make  a  statement  of 
his  resources  and  liabilities.  When  this  is  obtained,  and 
it  is  seldom  refused,  its  accuracy  is  tested  by  consulting 
official  records — tax  assessors '  and  tax  collectors '  books, 
the  registry  of  deeds  and  mortgages,  the  transfers  of 
title,  etc. — and  verified  as  far  as  practicable  by  local 
inquiry.  A  special  report  is  then  written  up  containing 
information  bearing  directly  on  the  moral  risk  involved 
in  trusting  to  a  man's  promise  to  pay.  His  reputation 
and  character,  as  known  in  his  home  community,  as  well 
as  his  habits,  tastes,  and  affiliations,  are  duly  set  forth, 
and  these  constitute  strong  e\^dence  touching  his  business 
responsibility,  or  his  lack  of  it. 


Sources  of  Credit  Information  17 

Bating 

This  special  report  is  then  carefully  studied  by  officials 
of  the  mercantile  agency,  and  the  firm  or  individual 
reported  on  is  given  what  is  known  as  a  "  rating. ' '  This 
rating  is  in  two  parts.  The  first  part  is  a  capital  rating, 
and  the  second  part  a  ci'edit  rating.  For  instance,  if  an 
examination  of  a  report  showed  that  a  company  had  a 
net  worth  of  $40,000,  and  all  information  showed  that  bills 
are  paid  promptly  and  that  discounts  were  taken  when 
offered,  a  rating  would  probably  be  given  of '  *  from  $30,000 
to  $50,000 — first  grade."  This  rating  would  be  put  on 
the  bottom  of  the  report. 

Rating  Books 

Each  of  the  commercial  agencies  publishes  what  is 
known  as  a  "  rating  book, ' '  which  is  loaned  to  subscribers, 
who  pay  a  fixed  annual  sum  for  its  use.  Four  editions 
come  out  each  year,  one  at  the  end  of  every  three  months. 
The  general  rating  books  are  large  volumes,  subdivided 
into  the  various  states  of  the  Union,  and  each  state  is 
subdivided  into  the  various  cities,  towns,  and  villages. 
Under  the  name  of  each  city,  town,  or  village,  is  an  alpha- 
betical list  of  firms  who  do  business  in  that  locality.  These 
concerns  also  issue  special  rating  books  covering  groups 
of  states  so  compiled  as  to  meet  the  business  require- 
ments of  subscribers  within  specified  territorial  limits. 
"Pocket"  volumes  of  cities  or  states  are  published  to 
meet  special  business  requirements. 

Each  name  listed  in  these  books  bears  opposite  to 
it  its  appropriate  rating,  expressed  in  the  form  of  a 
code,  and  the  key  to  this  code  is  written  on  the  front 
cover  of  the  book.  This  code  shows  both  the  capital 
and  credit  ratings,  so  classified  that  by  reference  to  the 


18  Credits 

book  it  is  possible  to  tell  at  a  glance  the  amount  of  capital 
invested  and  the  methods  used  in  meeting  obligations. 

Special.  Reports 

In  addition  to  the  rating  book  which  is  issued  to 
subscribers,  these  agencies,  on  request,  send  out  copies 
of  the  reports  which  were  used,  as  we  have  seen,  to  deter- 
mine ratings.  The  subscriber  contracts  for  a  certain 
number  of  these  reports  each  year,  the  cost  of  each  report, 
when  a  good-sized  contract  is  made,  being  in  the  neighbor- 
hood of  35  cents. 

The  mercantile  agencies  furnish  their  subscribers 
with  printed  requests  for  reports,  which  are  known  as 
*' tickets,"  (Figure  1).  These  tickets  pro\ide  spaces  in 
which  the  subscriber  may  insert  the  name  of  the  company 
on  whom  he  wants  a  report,  together  with  the  company's 
address.  Blank  spaces  are  left  for  the  date  of  inquiry, 
the  subscriber's  signature,  and  the  ticket  number.  After 
being  filled  out,  these  tickets  are  sent  to  the  nearest  office 
of  the  mercantile  agency,  and  if  the  agency  has  a  late 
report  on  file,  it  is  immediately  sent  to  the  subscriber.  If 
not,  arrangements  are  made  for  getting  the  report  imme- 
diately. Authorized  employees  of  the  agency,  kno^vn  as 
* '  reporters, ' '  procure  and  write  up  information  in  report 
form. 

When  the  company  inquired  about  is  not  located  in  the 
territory  covered  by  the  local  agency's  office,  another 
ticket  is  made  out,  by  the  latter  and  sent  to  the  district 
office  near  which  the  company  is  situated.  The  entire 
United  States  is  portioned  off  in  small  districts,  each  one 
controlled  by  its  own  district  office,  and  one  district  office 
can  send  a  ticket  to  another  one  for  information  in  the 
same  way  that  the  subscriber  makes  a  ticket  on  a  local 
office. 


Sowces  of  Credit  Infortnation  19 

The  reports  are  usually  complete,  giving  full  informa- 
tion regarding  the  previous  history  of  the  company,  its 
present  condition,  and  its  prospects.  The  report  usually 
contains  what  are  known  as  ' '  trade  opinions. ' '    These  are 


SCrBSORXBIER'S  ITCKJBrr. 


Th:e  Mercantile  j^gencjy 

R.  Q.  Duisr  &  CO. 


Give  us  in  confidence,  and  for  our  exclusive  use  and  benefit  in 
our  business,  viz. :  that  of  aiding  us  to  determine  the  propriety  of 
giving  credit,  ioformatiOQ  respecting  the  standing,  responsi- 
bility, etc.,  of 

Name  ..„ „ ^ 

Business „ _ „ ». 

Street  and  No..  ..,_„. „ .,., ..„...- 

Town 

County .^ 

State  


Sabscrlbera  to  stgn  above  theto8eIv««r' 


CHICAGO,..™ ,. — .191... 


Fig.  1.— "Ticket" 

obtained  by  the  reporter  from  companies  who  have  had 
dealings  with  the  concern  he  is  inquiring  about,  and  these 
trade  opinions  usually  indicate  what  the  company's  habits 
of  payment  are.  If  the  company  happens  to  be  a  corpora- 
tion, a  brief  history  of  each  of  its  principal  ofiQcers  will 


20  Credits 

be  given.  In  nearly  every  case  a  recent  financial  statement 
is  shown.  The  report  closes  with  a  rating,  as  we  have 
seen  before. 

Miscellaneous  Services 

Mercantile  agencies  also  perform  another  service,  one 
for  which  they  receive  no  direct  pay.  Special  reports  are 
sent  voluntarily,  furnishing  accurate  news  of  bank- 
ruptcies, assignments,  foreclosures,  ruinous  lawsuits, 
suspicious  transfers,  mortgages,  fires,  and  serious  losses 
of  every  kind.  Whenever  any  such  unfavorable  informa- 
tion regarding  any  company  is  received  in  the  district 
office,  a  special  report  is  sent  to  every  subscriber  who  has 
at  any  time  requested  information  on  that  concern.  From 
the  files  can  be  determined  which  subscribers  are  inter- 
ested, and  the  service  given  by  the  mercantile  agencies  in 
this  respect  is  very  valuable.  As  we  have  said,  no  charge 
is  made  for  this  service,  and  the  agencies  are  not  obliged 
to  furnish  it. 

Quasi-Public  Services  of  These  Agencies 

Both  of  these  agencies  perform  a  service  which  is 
quasi-public  in  character,  and  yet  of  considerable  value 
to  the  credit  man.  They  report  week  by  week  upon  gen- 
eral conditions  of  trade,  outlook  for  the  future,  crop 
conditions,  banking  returns,  values  of  money,  rates  of 
exchange,  faihires,  and  many  other  points  of  general 
interest.  They  study  and  analyze  information  collected 
in  the  course  of  their  investigations.  They  consider 
causes  for  failures,  give  statistics  of  the  number  of 
failures,  and  the  amount  of  assets  and  liabilities,  and 
statistically  compare  these  records  with  those  of  preced- 
ing months  and  years.  They  review  the  causes  of 
failures,   such   as   incompetence,   inexperience,   lack   of 


Sources  of  Credit  Information  21 

capital,  granting  of  credits,  personal  extravagance,  fraud- 
ulent disposition  of  property,  disasters,  and,  in  short,  all 
factors  contributing  to  business  mortalities.  This  in- 
formation published  in  periodical  form  serves  as  a 
valuable  guide,  or  business  barometer,  to  all  business  men, 
but  more  especially  to  credit  men. 

Value  of  Agency  Ratings  and  Eeports 

The  question  of  how  far  the  mercantile  agencies'  pub- 
lished ratings  or  special  reports  can  be  trusted  naturally 
presents  itself  here,  for  there  are  failures  in  business  by 
men  whom  both  ratings  and  reports  designate  as  good 
credit  risks.  However,  the  number  of  these  cases  is  rela- 
tively small,  and  it  may  be  assumed  that  the  agencies 
have  fully  demonstrated  their  general  efficiency.  Indeed, 
they  have  every  incentive  to  serve  their  patrons  well,  for 
they  cannot  hope  to  exist  on  any  basis  but  that  of  giving 
their  subscribers  their  money's  worth.  The  fact  that  no 
wholesale  house,  manufacturing  concern,  or  dealer  of 
any  size  feels  able  to  dispense  with  agency  service  may 
be  taken  as  undoubted  e\idence  of  its  value.  Indeed, 
the  large  rating  books,  containing  the  names  and 
addresses  of  all  dealers  in  every  line  and  kept  practically 
up-to-date  by  frequent  revision,  is  worth,  as  a  directory 
alone,  the  cost  of  the  complete  service  of  the  mercantile 
agency. 

Minor  Mercantile  Agencies 

In  nearly  every  city  of  size  there  is  at  least  one  local 
mercantile  agency  catering  to  the  business  men  of  its 
city.  The  operations  of  these  smaller  agencies  are  not 
extensive,  but  their  reports  and  ratings  are  often  of  great 
value,  particularly  to  credit  managers  of  retail  houses. 
These  agencies  occupy  a  field  not  touched  by  Bradstreet 


22  Credits 

and  Dun,  who  report  only  on  business  houses  and  do 
not  attempt  to  give  credit  information  regarding  indi- 
viduals. Many  of  these  smaller  agencies  issue  rating 
books,  although  their  ratings  do  not  pretend  to  be  any- 
thing more  than  credit  ratings,  since  the  average  indi- 
vidual on  whom  they  report  would  be  entitled  to  no 
capital  rating.  The  reporters  for  these  agencies  obtain 
their  infoiTuation  from  retailers  in  various  lines. 

Banks 

Opinions  differ  as  to  the  value  of  a  statement  by  a 
local  bank  regardmg  the  credit  standing  of  a  company. 
If  there  is  only  one  bank  in  the  town,  the  company  prob- 
ably is  a  depositor  there,  or  at  all  events  is  of  sufficient 
consequence  to  make  it  unadvisable  for  the  bank  to  risk 
antagonizing  it  by  an  unfavorable  statement.  If  there 
are  two  or  more  banks,  the  same  reasoning  holds  good, 
so  that  in  the  opinion  of  many  credit  men  only  secondary 
reliance  can  be  placed  on  what  a  local  bank  says  in  reply 
to  an  inquiry  regarding  a  doubtful  credit  risk.  I  do 
not  mean  that  bankers  habitually  falsify  their  state- 
ments, but  their  language  is  often  so  noncommittal  that 
the  credit  man  desiring  to  inform  himself  in  a  dubious 
case  can  rarely  obtain  a  satisfactory  answer  from  the 
local  banks.  The  only  conceivable  method  of  testing  the 
bank's  sincerity  is  to  propose  the  discounting  of  such 
a  company's  note  when  indorsed  ''without  recourse." 
But  a  note  cannot  be  secured  except  by  parting  with 
the  goods,  and  when  the  bank  refuses  to  discount,  it  is 
belated  news  as  to  the  signer's  responsibility. 

In  the  case,  however,  of  a  large  wholesale  house  or 
manufacturing  company  which  has  many  banking  con- 
nections, it  is  found  that  information  obtained  through 
these    banking    connections    is    highly    valuable.      The 


Sources  of  Credit  Information  23 

reason  for  this  is  that  as  the  inquirer  is  a  customer,  he  is 
entitled  to  the  frankest  opinion  of  the  bank  regarding 
the  proposed  credit  risk. 

Many  of  the  larger  banks  have  installed  their  own 
credit  departments,  and  a  satisfactory  arrangement 
can  often  be  made  with  such  a  bank  looking  toward  the 
mutual  exchange  of  credit  information.  The  National 
City  Bank  of  New  York,  for  example,  has  a  large  and 
exceedingly  efficient  credit  department,  which  yearly 
sends  out  countless  credit  inquiries  to  all  parts  of  the 
country.  The  bank  desires  this  information  because  of 
the  large  amount  of  commercial  paper  which  it  pur- 
chases. This  commercial  paper  may  have  originated 
from  almost  any  point  in  the  United  States.  Before 
purchasing  it  from  the  commercial  paper  brokers,  who 
cannot  of  course  guarantee  it,  the  bank's  credit  depart- 
ment must  make  an  independent  investigation. 

COMMEECIAL  PaPEE  BrOKEES 

In  connection  with  the  subject  of  commercial  paper, 
we  m'^y  note  another  highly  valuable  source  of  credit 
information,  namely,  the  commercial  paper  broker, 
whose  business  it  is  to  purchase  short-time  notes  from 
manufacturing  and  trading  companies  who  need  addi- 
tional capital  for  short  periods  and  to  sell  these  notes 
to  banking  institutions  who  have  funds  to  spare.  This 
kind  of  investment  is  looked  upon  with  great  favor  by 
bankers  because  of  its  liquid  character.  The  bank  is 
able  to  tell  just  how  long  its  funds  will  be  tied  up  at  the 
time  it  invests  them. 

The  commercial  paper  brokers  have  buyers  all  over 
the  country,  who,  like  salesmen,  solicit  concerns  whose 
paper  would  prove  attractive  to  banks.  Whenever  any 
paper  is  purchased  from  a  company,  a  complete  report 


24  Credits 

is  made  up  very  much  like  the  report  of  the  commercial 
agency,  except  that  it  is  likely  to  be  more  accurate,  and 
a  late  statement  is  furnished.  The  report  and  financial 
statement  are  submitted  to  the  banks  who  buy  such 
paper.  If  it  is  possible  for  the  credit  man  to  interchange 
information  with  one  of  these  commercial  paper  houses,, 
he  can  rely  on  the  accuracy  and  completeness  of  its 
reports.  It  is  not  difficult  to  effect  such  an  arrangement, 
inasmuch  as  the  credit  department  of  such  an  establish- 
ment is  always  on  the  outlook  for  new  sources  of  credit 
information. 

Local  Business  Houses 

Of  all  the  recommendations  a  candidate  for  credit  may 
submit,  those  coming  from  practical  business  men  carry 
the  most  weight.  None  is  more  exacting  in  his  standards 
or  more  unbiased  than  the  manufacturer  or  other 
reputable  man  of  affairs.  Rightly,  therefore,  the  credit 
man  holds  opinions  from  such  men  in  high  esteem. 

This  kind  of  information  is  usually  solicited  by  the 
credit  man  in  the  form  of  a  letter  of  inquiry  (Figure 
2).  This  letter  may  be  addressed  to  men  who  are 
creditors  of  the  company  inquired  about,  or  to  substan- 
tial business  men  in  the  community,  whether  it  is  known 
that  they  are  interested  in  the  account  or  not.  The  local 
business  man  is  well  qualified  to  give  information  bearing 
particularly  on  the  customer's  ability  and  character. 

Such  information  should  be  sought  upon  the  bases  of 
co-operation  and  reciprocity.  If  possible,  an  equivalent 
should  be  given  with  the  inquiry;  it  is  evidence  of  fair- 
ness and,  through  the  good  will  established,  is  more  likely 
to  bring  a  prompt  and  satisfactory  reply.  (A  form  for 
such  use  is  shown  in  Figure  3.  When  a  credit  man  re- 
ceives such  a  statement  of  ''experience,"  he  is  expected 


o 


^ 


^ll^CP€l^^^€l^j 


^ 


CHICAGO,  NEWYORK,  PARIS, 


<f,afi. 


&^^S^: 


j^^>are';^ea<rt^<0/e^i>C-^ztn^n'a<^ut^A/4/^r^ 


FlO.  2.— Crptlit  Mau'B  Letter  of  Iiiqiiiiy 


c 


-^S>^- 


y/W- 


^/?^eaanUfmL 


Sources  of  Credit  Information 


25 


Fig.  3. — Trade  Inquiry  Blank 


26  Credits 

to  file  it  among  Lis  permanent  records,  returning  at  once 
the  duplicate  properly  filled  out.  Thus  each  will  have  the 
benefit  of  the  other's  knowledge,  and  if  a  sufficient  num- 
ber of  these  exchanges  are  made,  the  financial  status  of 
the  customer  in  question  will  be  revealed  to  all  the  credit 
men  supplying  thus  the  ''experience"  of  their  houses. 
Results  on  such  blanks  are  not  by  any  means  uniformly 
satisfactory,  but  they  constitute  one  method  of  exchang- 
ing information. 

Lawyers 

A  la\\^er's  professional  practice  renders  him  familiar 
with  a  mass  of  facts  not  accessible  to  those  engaged  in 
other  lines  of  business.  He  is  well  qualified  to  reckon  the 
moral,  as  well  as  the  financial,  responsibility  of  every 
resident  in  his  community,  and  in  doing  this  his  stand- 
point is  that  of  a  trained  observer.  Nothing  that 
influences  business  responsibility  can  remain  long  con- 
cealed from  him,  whether  growing  out  of  litigation  or 
due  to  other  things  affecting  property  interest,  as  indi- 
cated by  official  records. 

His  acquaintance  with  men's  personal  history  and 
family  affairs  often  enables  him  to  pronounce  on  the 
moral  risk  involved  in  trusting  to  their  promises  to  pay. 
Wills,  bequests,  court  decrees,  judgments,  all  these 
things  and  still  others,  such  as  local  gossip,  and  the 
indirect  evidence  supplied  by  public  comment  on  mode 
of  life,  personal  habits,  tastes,  and  even  vices,  are  at  the 
disposal  of  the  local  attorney  who  desires  to  report  on 
the  character  and  ability  of  the  man  under  investigation. 
Obviously,  a  competent  attorney  can  render  credit 
services  hardly  to  be  expected  of  anybody  else. 

The  most  important  difficulty  is  how  to  prevail  on  the 
local  attorney  to  perform  such  a  service.    There  is,  of 


Sources  of  Credit  Information  27 


On. 


41  Park  Row,  New  York  City 


Dear  Sir: 

Your  name  appears  on  our  list  of  attorneys  as  having  repre- 
sented us,  or  as  being  ready  to  look  after  our  interests,  should 
occasion  arise  requiring  your  services.  Inclosed,  therefore,  please 
find  one  dollar  for  which  please  send  us  confidentially  as  com- 
plete a  report  as  possible  ON  THIS  BLANK  regarding 

,  especially  answering  the  various  questions 

specified.  Delayed  reports  are  of  no  use,  wherefore  please  be 
prompt.  Do  not  disclose  our  name  as  inquiring.  File  our  name 
as  being  interested  in  the  above  named  business,  and  advise  us 
at  once  of  aiiy  change  affecting  his  or  their  financial  standing. 

Yours  truly, 


Name Town 

County State 

Full  names  of Nationality?.  .Age?.  .Married?. . 

all  partners Nationality?.  .Age?.  .Married?. . 

Nationality?.  .Age?.  .Married?. . 

How  long  in  present  business  ? Amount  of  capital  in- 
vested? $ Ever  failed? When? How 

did  they  settle  ? Ever  been  sued  ? Ever  asked 

extension  ? Is  there  any  evidence  of  overdue  indebted- 
ness ? If  so,  of  what  kind  and  amount  ?  

Reputation  for  ability  (good,  fair,  or  bad)  ? Honesty? 

Promptness  ? Is  he  doing  a  good  business  ? 

Location  relative  to  the  business  centre  ?  Is 

Fig.  4. — Form  for  Attorney's  Eeport 


28  Credits 


stock  in  good  condition  ? Your  estimate  of  stock  car- 
ried ?  $ Is  it  insured  1 For  how  much  ?  $ 

Value  of  real  estate  above  exemptions  and  incumbrances?  $ 

Value  of  other  assets  ?  $ Your  estimate  of  net  worth 

above  all  debts,  exemptions,  and  incumbrances  ?  $ Of 

whom  does  he  buy  goods  ? 


REMARKS 

(If  there  are  any  answers  which  cannot  be  made  in  the  spaces 
above,  please  indicate  by  some  mark  and  amplify  in  the  spaces 
hereunder) 


Attorney's  name 
Address 


(Do  not  write  below  this  heavy  line) 


Fio.  4. — Continued 


Sources  of  Credit  Information  29 

course,  notlimg  improper  in  enlisting  his  best  efforts, 
nor  is  it  unprofessional  for  him  to  accept  pay  for  these 
efforts,  yet  some  lawyers  resent  such  a  commission  by 
a  wholesale  house  as  a  reflection  on  the  dignity  of  their 
profession.  Just  how  such  a  view  can  be  reconciled  with 
these  same  lawyers'  alacrity  in  accepting  claims  for 
collection  does  not  appear. 

There  will  always  be  more  or  less  difficulty  in  securing 
the  right  kind  of  local  attorney,  for  the  better  suited  one 
is  for  the  credit  man's  purpose  the  less  likely  he  is  to  need 
outside  clients  or  the  less  warm  would  be  his  zeal  in 
safeguarding  their  interests.  Just  what  information  is 
desired  and  expected  of  him  is  shown  on  the  report 
blank  shown  in  Figure  4.  It  cannot  be  expected  that  an 
attorney  should  answer  fully  all  the  questions  in  every 
case  as  required  in  this  form  for  the  fee  of  one  dollar 
sent,  since  it  may  be  necessary  for  him  to  consult  offi-cial 
records  at  the  expense  of  much  labor  and  time.  This 
would  call  for  a  special  arrangement  as  to  pay.  In  many 
cases  a  shorter  report  form  will  prove  more  satisfactory. 
It  should  make  clear  the  point  that  special  and  definite 
information  is  wanted  in  regard  to  the  financial  standing, 
general  character,  and  responsibility  of  the  person  about 
whom  information  is  desired. 

Collection  Agencies 

In  every  city  and  town  there  exists  at  least  one  collec- 
tion agency,  which  makes  it  its  business  to  collect 
accounts  on  a  commission  basis,  its  customers  being 
various  business  houses  and  manufacturing  plants  in 
its  vicinity.  Arrangements  can  often  be  made  with  such 
collection  agencies  whereby  they  furnish  the  results  of 
their  experience  in  attempting  to  make  collections.  It 
is  not  often  that  their  reports  are  of  extraordinary  value, 


30  Credits 

since  the  mercantile  agencies  usually  get  unfavorable 
information  bearing  on  the  slowness  of  the  concern  in 
making  payment  as  promptly  as  do  the  collection 
agencies.  The  collection  agency,  however,  does  form 
one  of  the  many  sources  w^hich  the  credit  man  should 
ever  keep  in  mind. 

Ceedit  Associations 

A  nation-wide  association  of  wholesale  merchants, 
manufacturers,  and  jobbers,  willing  to  make  common 
property  of  their  experience  with  customers,  has  long 
been  advocated  and  several  times  begun,  but  the  move- 
ment has,  of  course,  been  limited.  To  be  effectual,  it 
would  have  to  include  at  least  the  chief  manufacturing 
and  distributing  centers  where  buyers  go  to  select  their 
stocks;  otherwise  one's  having  a  bad  reputation  in  one 
market  would  not  affect  his  purchasing  power  in  another. 

There  have  been  in  existence  for  some  years  organi- 
zations, composed  of  manufacturers  or  merchants  in 
kindred  hues,  which  act  as  clearing-houses  for  the 
exchange  of  credit  experience.  Chief  among  these  is 
the  Credit  Clearing  House.  A  brief  description  of  its 
operation  will  reveal  the  general  plan  of  all  such  organi- 
zations. 

Its  membership  is  made  up  of  manufacturers  and 
merchants  in  most  of  the  large  trade  centers  of  the 
country.  These  members  list  the  names  of  all  their  cus- 
tomers, to  be  filed  in  one  central  office.  They  also  furnish, 
periodically,  the  names  of  all  new  customers.  The  cen- 
tral office  then  ''posts"  from  these  lists  to  loose-leaf 
sheets,  each  one  being  headed  with  the  name  of  a  single 
buyer.  Thus,  the  sheet  headed  with  John  Smith  Mer- 
cantile Company,  Madison,  Wisconsin,  will  contain  the 
names  and  addresses  of  the  manufacturers  and  whole- 


Sources  of  Credit  Information  31 

salers  from  which  it  buys.  There  may  be  three  or  four, 
or  several  dozen,  depending  on  how  extensively  the 
company  scatters  its  purchases.  Now,  suppose  it  wants 
to  buy  from  William  Jones  &  Company,  with  whom  it 
has  never  dealt  before.  The  credit  manager  of  William 
Jones  &.'  Company  sends  an  inquiry  to  the  Credit  Clear- 
ing House  for  information  as  to  others'  experience  with 
the  account  of  the  John  Smith  Mercantile  Company, 
giving  the  amount  of  their  first  order.  The  clearing- 
house turns  to  the  record  of  the  John  Smith  Mercantile 
Company  and  finds,  let  us  say,  that  six  firms  report  it 
as  being  a  customer.  These  six  firms  are  then  requested 
to  give  their  experience.  This  they  do,  and  the  informa- 
tion is  classified  in  a  typewritten  report,  which  goes  to 
William  Jones  &  Company.  A  sample  of  such  a  report 
is  shown  in  Figure  5.  You  will  observe  that  no  names 
are  shown,  only  symbols,  which  indicate  the  kinds  of 
business  conducted  by  the  contributing  firms.  The  opera- 
tion of  the  clearing-house  is  almost  automatic,  because 
as  each  new  inquiry  is  received  a  new  name  can  be 
posted  to  the  record  of  the  John  Smith  Mercantile  Com- 
pany. Each  new  name  gives  one  more  source  of 
information. 

This  Credit  Clearing  House  detects  the  man  who  plans 
to  beat  his  creditors,  because  his  total  orders  in  all 
markets  are  known  and  any  substantial  and  suspicious 
increase  can  be  noted  and  investigated. 

The  National  Association  of  Credit  Men 

Although  attempts  to  unite  all  wholesale  houses  in 
a  national  organization  have  not  proved  entirely  success- 
ful, it  cannot  be  said  that  credit  men  have  shown  them- 
selves indifferent  to  their  own  interests,  for  they  took 
steps  as  long  ago  as  1893  to  organize  an  association  for 


$ 

$ 

« 

$ 

E 

0 

400 

0 

0  first 

C 

1628 

59S 

751 

0  slow 

B 

217 

0 

100 

100  slow 

cb 

500 

356 

415 

0  fair 

32  Credits 

5-P-.1A7-. 

THE  CREDIT  CLEARIHG  HOUSE  REKKT 
IOWA  MERCANTILE  CO.,     DBCEMBER-2 9-1909-     DDBUQDE,  IOWA 

H'st  Cr.  Order  Ovrtng    Due      CHICAGO  DISTRICT 

order  fcr 
sold  2-1X8- 

SO  days-    due  November- 
order  for  shipment  Spring- 
due  Deoember-  sold  eeveral 
seasons- 

B     70     0    15      4  Blow        Gatisfactorj'-  due  January 

17th    terms  30  days  sold 
1899  to  Deoember-ISOQ- 

H    106     0    80     64  allow  30  dys  terms  60  days-  sold  years- 

3     60      0    60     0  slow        30-60  days  and  disoovints  in 

10-30  days-  drafts  paid 
when  rLad&-  due  2/1910- 
sold  July-1907  to  November- 
1909- 

n    127      0  0  disoounts    in  90  days-  due  3/21-1910- 

terms  regular  sold  lfe.y-29- 
1902  to  December-27-1909- 

h   1870     0  1164      0  slow        30  days-  due  Deeeinber-31- 

1909-  terms  60  2/10  and 
dating-  S3ld-1909- 

imniESOTA  DISTRICT 

J    208      0   208      0  fix'st       order-  terms  60  days-  sold 

Aiigs-U  1908  1  bill 

B    723     0   331    331  slow        60  days-  sold  years  to 

12/3/1909- 

SAINT  LOmS  DISTRICT 

0    ©25    S97   880     0  slow        15  to  90  days  en  account- 
order  for  shipment  Spring- 

1910-  duG  January 

1910-     terms  60  d  ays  and 
dating  sold  Atigu3t.-1908  to 
Dooember-1909- 

PlG.  5. — Credit  Clearing  House  Report 


E'rt  Cr. 
B    W4 

Order  Owing 
$    C 
0     0 

Due         ( 

0  discounts 

0    766 

0 

29 

0  discounts 

B    638 

0 

0 

0  oloT 

Sources  of  Credit  Inj orfnation  33 


THE  CREDIT  ClfiARIHO  HOUSE  REPORT —  CenUnued— 


CINClirai-TI  DISTRICT 

in  30  d  ays-  terms  60  days- 
sold  March-1907  to  Doocnibor- 
1909- 

tenna  regular   scld  years  to 
Deceni)er-1909- 
45  days-  terms  usual-  Bold. 
Jun»-1901  to  Septrember- 
1908 

NEW  YORK  DISTRICT 

D  86  0  0  0  *hen  du©- 

Ee         85  0  0  0  when  due       RETUITl'IS  GOODS  DNJTJSTLY- 

tenr.s  ri'3t-   sold  IDOG- 

B         390  25       390  0  slow  46  days  to  proir.pt-  du« 

4/1-1910-  order"  for  ship- 
msnt  at   onoe-  terms  30  days- 
sold  5A-1907     to  Deoeraber-1909- 

PHILADELPHIA  DISTRICT  , 

0-000  GAifCELED       ord^r  $91.00     7/3/1908 

UILWAUKSE  DISTRICT 

F  69  0  0  0'  discounts    'in  10  days-    terma  dating 

2/10   sold  1901  to  1908- 
L  57  0  6  0  when  due       due  Febraary  15th-  terms  CO 

days-  sold  Septembor-15-il908  to 
December-15-1909- 
Oo       539  0  0  0  slow  50  to  75  days-  terms  l/lO 

30  days-  sold     /19-1906  to 
date- 
Co       248  "0       117  0  slow  30-90  days-     dus  Moremiiei^ 

Dece3.ter  January  it  ^ebruary- 
terais  regular-  sold  August- 
1905  to  DeoeiQber-1909- 

DES  WOIKES  DISTRICT 

nn       261  6  0  0  when  due       terns  CO  days   dating  2/10 

1/20  net  30  days-  sold 
years  tt  Oetober-2-1909~ 

!  60  0        26  20  diaoev.ite-  all  bills- 

teriijs  regular  sold  long  tiiao- 

FiG.  5. — Continued 


34  Credits 

the  advancement  of  their  common  eauge.  Their  organi- 
zation includes  some  of  the  brightest  men  in  the  country, 
and  their  public  utterances  are  the  last  word  on  all 
questions  of  selling  and  credit  propriety. 

In  their  discussions  every  phase  of  credit  science  is 
viewed  and  handled  from  the  business  man's  standpoint, 
the  illustrations  and  examples  being  drawn  from  recent 
experience.  Many  of  the  association's  members  possess 
national  prominence  as  experts  in  particular  branches 
of  credit.  The  credit  man,  therefore,  who  mshes  access 
to  the  fountain  head  of  knowledge  regarding  the  finer 
aspects  of  his  profession,  must  avail  himself  of  every- 
thing the  association  has  done  to  further  credit  interests. 

The  association  has  developed  and  stood  sponsor  for 
a  number  of  standardized  forms  used  in  credit  investiga- 
tions. It  has  also  done  much  to  educate  business  men  to 
a  proper  appreciation  of  the  use  of  these  forms.  This 
constructive  and  educational  work  has  been  very  bene- 
ficial in  the  development  of  better  credit  relations.  These 
forms  may  be  secured  directly  from  the  association. 

In  addition  to  the  more  obvious  advantage  of  member- 
ship in  the  National  Association  of  Credit  Men,  as 
indicated  above,  there  are  those  that  come  from  the  inti- 
mate personal  relations  established  during  the  yearly 
conventions  and  continued  by  correspondenoe.  Such 
interchanges  of  confidence,  and  advice  by  friends  and 
acquaintances  in  allied  lines  of  business  are  invaluable. 

Some  credit  men  have  found  that  in  their  particular 
line  of  business  they  can  get  better  results  by  writing 
letters  of  inquiry  to  fellow  members  of  the  National 
Association  of  Credit  Men  than  by  sending  the  blank 
forms  which  are  illustrated  in  these  divisions.  Such 
letters,  if  courteously  worded  and  oontaining  requests 
for  specific  information,  produce  the  best  kind  of  results. 


Sources  of  Credit  Information  35 

Both  the  writer  and  the  receiver  of  the  letter  belong  to 
the  same  organization  and  have  the  same  kind  of  aims 
and  ideas,  and  a  certain  frankness  is  noted  in  repUes  to 
letters  of  this  kind,  which  are  rare  in  the  usual  credit 
man's  experience. 

Salesmen 

The  salesman  on  the  road  is  the  man  that  gets  the 
business  for  the  house.  In  his  special  territory  he  knows 
personally  every  dealer  in  his  line.  He  is  a  good  mixer, 
and  the  retailer  looks  forward  to  his  calls.  His  duties 
embrace  the  acquiring  of  information,  as  well  as  the  sell- 
ing of  goods.  His  constant  intercourse  with  other  sales- 
men and  his  regular  calls  on  retail  merchants  put  him  in 
possession  of  all  the  news  as  to  the  trade  of  his  line. 
His  report  on  a  merchant  or  a  locality  embodies  what 
he  knows  from  observation,  or  has  learned  through 
inquiry  while  on  the  ground.  For  this  reason,  the  infor- 
mation which  the  traveling  salesman  gives,  ranks  as  the 
first-hand  kind,  proceeding  from  an  investigator  able 
to  judge  and  anxious  to  impart.  Two  typical  reports 
are  presented  in  Figures  6  and  7.  The  briefer  form 
contains  all  that  a  salesman  can  reasonably  be  expected 
to  submit.  These  reports  are  valuable,  but  no  less  useful 
are  his  oral  reports  upon  his  return  from  his  trips. 

The  salesman's  enthusiasm  and  desire  to  sell  goods 
often  warps  his  judgment  regarding  certain  of  the  credit 
features.  These  can  be  developed  from  other  sources. 
The  immense  value  of  the  salesman's  report  lies  in  his 
opinion  regarding  a  customer's  ability.  A  salesman  is 
in  a  position  to  compare  one  customer  with  another  in 
tlie  same  line  of  trade.  He  knows  which  customers  use 
modern  methods  and  which  cling  to  old-fashioned  ones. 
He  can  give  information  regarding  the  condition  of  the 


36 


Credits 


Name  of  firm 

(Give  it  exactly  and  spell  it  correctly) 

Town County State 

Full  name    f Nationality  ? . .  Age  ? .  .  Married  ? . . 

of  J Nationality?.  .Age?.  .Married?. . 

partners     [ Nationality  ? . .  Age  ? . .  Married  ? . . 

Your  estimate  of  amount  of  stock 

carried?  $ 

Is  it  insured  ? How  mucli "? 


Stock  consists  of  ? . . . . 
How  long  in  business? 


Condition  of  stock? 

How  many  clerks? 

Location  relative  to  busi- 
ness center  ? 

What  are  local  opinions  as 
to  habits? 

Ability? 

Expenses? 


Value  of  real  estate  above  exemp- 
tions and  incumbrances  ?  $ 

Value  of  other  assets?  $ 

Your  estimate  of  total  net  worth 
above  exemptions  and  incum- 
brances ?  $ 

Is  he  thought  to  be  making  money? 


NAVIES  AND  ADDRESSES  OF  THOSE  FROM  WHOM  HE 
HAS  BEEN  PURCHASING 


Salesman 
REMARKS 


Fig.  6. — Form  for  Snlesman's  Eeport 


Sources  of  Credit  Information  37 


Please  answer  the  following  questions  when  you  send  in  your 
order : 


What  line  of  business  ? 

Who  compose  the  firm  ? 

Age? Married? Habits? 

Business  capacity  (fair,  good,  excellent)  ? 

Prospect  for  success  ? , 

How  long  in  business  ? Is  he  prompt  in  paying  ? , 

If  he  has  ever  failed,  when  and  where  ? , 


How  much  capital  invested  in  business  ? 

Average  amount  stock  ? 

(If  in  the  liquor  business,  amount  of  annual  license? ) 

( If  in  the  liquor  business,  when  does  the  license  expire  ? ) 


REMAKES 


Salesman 


Fie.  7. — Salesmsii'e  Eejxwl,  BrieX  Form 


38  Credits 

customer's  stock  and  his  apparent  prosperity  on  the 
basis  of  his  window  displays  and  all  those  other  things 
which  go  to  show  whether  a  merchant  is  an  able  business 
man  or  not.  It  is  this  kind  of  information  that  the  sales- 
man should  be  asked  to  report.  Through  other  sources 
we  can  determine  what  the  customer's  net  worth  is,  and 
also  his  character.  You  should,  therefore,  remember  that 
of  all  the  sources  of  information  this  is  one  of  the  most 
important  if  rightly  handled. 

Financial  Manuals,  Pekiodicals,  and  Reporting 
Services 

For  the  credit  man  whose  customers  are  large  cor- 
porations, such  as  railroads  and  manufacturing  plants, 
valuable  data  can  be  taken  from  the  various  corporation 
manuals,  financial  papers,  periodicals,  etc.  These  are 
issued  primarily  for  investors  and  speculators,  and  are 
not  intended  for  the  credit  man,  but  since  they  contain 
late  financial  statements,  showing  the  condition  of  nearly 
every  company  of  importance  in  the  country,  and  in 
many  cases  show  profit  and  loss  statements  also,  it  is 
clear  that  the  credit  man  can  adapt  them  to  his  purposes. 
The  credit  department  which  deals  mth  large  and  impor- 
tant concerns  would  do  well  to  subscribe  to  these  various 
sources.  The  papers  and  magazines  as  they  come  in 
should  be  carefully  read,  and  any  items  of  interest 
clipped  and  filed,  as  will  be  explained  later. 

The  corporation  manuals  are  issued  each  year  by  three 
or  four  different  companies.  They  usually  come  out  in 
two  or  three  volumes  for  various  classes  of  business, 
such  as  railroads,  public  utilities,  etc.  No  rail  mill  or 
railroad  supply  house  could  afford  to  bo  without  these 
manuals  on  railroads.  They  show  complete  details  of 
financial    condition,    earnings,    bonded    and    mortgaged 


Sources  of  Credit  Information  39 

indebtedness,  the  kinds  and  amount  of  capitalization, 
etc.  You  will  note  that  this  type  of  information  bears 
mainly  on  the  capital  element  of  credit,  and  is  of  but 
little  use  in  judging  the  other  two  elements,  namely, 
character  and  ability. 

Trade  Papers 

The  credit  man  should  carefully  read  trade  papers  of 
the  various  lines  in  which  his  customers  are  interested. 
For  instance,  the  credit  manager  of  an  iron  company 
should  subscribe  to  one  of  the  foundry  trade  papers, 
whereas  a  jewelry  manufacturer's  credit  man  should 
subscribe  to  some  jewelers'  trade  paper,  and  so  on.  In 
addition  to  containing  general  trade  news,  they  often 
have  interesting  items  of  information  regarding  cus- 
tomers. 

The  Customer 

We  have  reserved  until  the  last  that  particular  source 
of  information  which,  on  account  of  its  importance, 
should  possibly  have  been  mentioned  first.  We  refer 
to  the  customer  himself.  It  is  not  always  possible  for 
the  credit  man,  particularly  in  a  large  establishment,  to 
meet  all  the  customers  or  even  a  considerable  proportion 
of  them.  He  can,  however,  arrange  to  make  credit  trips 
around  the  country,  calling  on  those  particular  customers 
concerning  whose  credit  standing  he  is  most  in  doubt. 
It  would,  of  course,  be  absurd  for  him  to  make  a  special 
trip  to  visit  a  million-dollar  corporation  which  purchased 
only  a  thousand  dollars'  worth  of  goods  from  his  con- 
cern during  the  year.  On  the  other  hand,  it  might  be  of 
great  importance  for  him  to  visit  a  three-thousand  dollar 
company  that  purchased  a  thousand  dollars'  worth  of 
goods  a  year.    He  should,  therefore,  endeavor  to  know 


40  Credits 

best  those  customers  in  whom  he  is  naturally  interested, 
and  his  interest  in  his  customers  is  not  determined  so 
much  by  the  volume  of  their  purchases  as  by  the  ratio 
of  their  purchases  to  their  net  worth. 

Often  when  a  concern  is  seeking  a  line  of  credit,  its 
representative  will  visit  the  credit  man,  endeavoring  to 
establish  a  satisfactory  arrangement  with  him.  Such  an 
opportunity  is  invaluable,  because  the  credit  man  then 
has  an  opportunity  to  learn  many  things.  If  a  buyer 
is  adroitly  led  to  express  himself  on  market  conditions 
and  the  trend  in  his  particular  line,  it  will  soon  be  ap- 
parent whether  he  is  shrewd  or  uninformed.  The  credit 
man  should  have  no  more  difficulty  in  steering  the  con- 
versation in  this  channel  during  the  first  interview  than 
an  engineer  or  a  chemist,  for  example,  experiences  in 
causing  a  man  to  reveal  himself  as  an  expert  or  novice 
in  engineering  or  chemistry. 

Shrewdness  does  not  insure  honesty,  but  a  clever 
buyer,  by  the  wise  selection  of  goods,  insures  that  they 
will  be  salable,  and  thus  increases  his  power  to  pay  bills 
at  maturity,  whereas  the  uninformed  buyer  is  apt  to 
overstock  mth  poorly  selected  goods,  which  detracts 
from  his  ability  to  meet  his  obligations  when  they  fall 
due.  It  is  not  the  business  of  the  credit  man  to  give 
instruction  in  correct  buying,  but  when  he  recognizes 
shortcomings  in  this  regard,  it  is  clearly  his  duty  to 
minimize  the  chances  of  loss  to  his  employers  by  curbing 
the  customer's  inclination  to  overbuy.  Injudicious  buy- 
ing on  the  part  of  the  retailer  always  results  in  his  having 
slow  sales  and  small  profits,  which  means  uncollectible 
accounts  for  the  wholesaler.  As  a  consequence,  it  is  far 
better  to  reject  such  business  altogether  than  to  incur 
loss  through  accepting  it. 

It  is  manifestly  easier  to  judge  an  unknown  customer's 


NAMl 


for  the  pun 
representatn 
liabilities,  u\ 
present  pur> 
\   Namei\ 


for  the  purpose  of  obtaining  credit  withJACHSON  BROTHERS,  of  Chicago,  III.,  do  make  the  following  statement  and 

representations  of present    true  financial  circumstances,  wealth,  mercantile   connections,  assets   and 

Habilitiea,  which  said  representations  shall  be  the   basis  of credit  with  JACKSON B80THEBS,  for  this 

present  purchase,  and  for  all  purchases  hereafter. 

1   Name  of  firm a    co'partnership  composed  of 


.„0„». 

For  m^nhandi,,^  {givs  nama  and  date  when 

du^  on  other  «,-rf«> 

HM,  „,t  ».«.»„,  ,o.J 

Chattel  mortuoQe 

C.rt  .,  /..nj  .,  „  6.„» 

Uoon  what  propertu 

OM,  p,™.»o/  „„.rU 

«.«/  ,MU.  mtrM  u<,l„f> 

When  due                                                      \ 

% 

"           >,,....,..            , 

How  sec.r.d 

tanta.  -.?.»«,      » 

ln.„ma.                 $ 

Encumbrance  on  real  estat. 

Rtftfer,,,, : 

Amourit  of  past  du«  notes 

Are  you  surety  en  notes  or  bonds? 

Confd..tioJ  onaoth^r  debts  not, nc,ud.d. boo 

7M  a«.» 

ntal  Uabmes 

The  answer  to  all  questions  not  answ 

ered  hereon 

in  writing  is  "No."    The  aboue  statement,  both  printed  and 

written,  has  been  oarefully  read  bv 

Signature  . 


FlQ.  8.— Pinancial  Statoin 


NAMES    OF    CREDITORS 


— 

..„.„ 

....„„. 

■A-J5?.v„::, 

c 

ES    OF    CREDITORS 


Addres« 

Date  Due 

Amount  of 
Indebtedness 

1 

j 

1 

IV/OO      ulix  v»  *-»Q^*     ** j~               _, 

i 

It  is  manifestly  easier  to  judge  an  unknown  customer's 


Sources  of  Credit  Infor^nation  41 

skill  as  a  buyer  than  it  is  to  conjecture  his  promptness 
in  paying  for  the  goods.  The  former  characteristic 
reveals  itself  at  once;  the  latter  cannot  be  discovered 
before  the  debt  becomes  due.  If  ability  to  select  goods 
suited  to  the  needs  of  the  community  where  they  are  to 
be  sold  is  accompanied  by  unmistakable  marks  of  pru- 
dence, judgment,  system,  and  orderliness,  there  is  strong 
reason  for  inferring  that  payment  will  be  prompt.  On 
the  other  hand,  if  a  man  keeps  no  books,  carries  no  insur- 
ance, and  lets  his  business  run  itself  without  order  or 
system  (which  things  are  often  frankly  acknowledged  in 
the  course  of  a  conversation),  there  will  be  little  profit 
and  less  satisfaction  from  opening  an  account  with  him ; 
for  no  degree  of  personal  honesty  counterbalances  incom- 
petency, which  results  in  bankruptcy. 

Where  the  credit  man  can  visit  the  customer's  place 
of  business,  whether  it  be  a  retail  shop  or  a  large  manu- 
facturing plant,  he  is  able  to  gain  certain  information 
which  he  can  obtain  in  no  other  way.  To  the  credit  man's 
inquiring  mind  many  things  about  such  an  establishment 
are  significant.  He  can  direct  his  questioning  along 
profitable  channels,  instead  of  feeling  in  the  dark.  He 
can  judge  a  man's  or  a  company's  eSiciency  or  ineffi- 
ciency quickly  after  he  has  seen  the  place  of  business. 

In  connection  with  these  credit  trips,  a  credit  man  can 
visit  the  banks  with  which  he  has  been  in  correspondence 
and  by  shrewd  questioning  obtain  data  which  the  banks 
may  not  have  furnished  before.  A  banker  cannot  so 
easily  assume  a  noncommittal  attitude  when  talking  face 
to  face  with  the  credit  man  as  he  can  when  writing  him. 
We  shall  have  more  to  say  about  personal  interviews 
later  on.  It  is  in  such  interviews  that  a  credit  man  has 
an  opportunity  to  prove  his  worth. 


42  Credits 

The  Signed  Statement 

In  connection  with  this  section  we  should  not  omit 
a  discussion  of  that  most  important  document,  the  signed 
financial  statement.  A  new  customer  of  a  wholesale 
house  or  manufacturing  concern  will  be  asked  to  submit 
a  financial  statement.  Forms  of  such  statements  are 
given  in  Figures  8  and  9.  It  is  well  to  study  their 
reach  and  weigh  their  importance,  for  on  the  accuracy 
and  completeness  of  this  document  often  depends  the 
confidence  placed  in  its  signer.  If  his  replies  lack  pre- 
cision or  conflict  in  a  way  indicating  an  endeavor  to 
evade,  they  are  far  more  hurtful  to  his  purposes  than  a 
frank  admission  of  unfavorable  circumstances  would  be. 
This  is  not  surprising,  for  if  a  man  deliberately  misstates 
facts  as  to  his  financial  condition,  it  can  only  be  with  the 
object  of  defrauding,  and  such  an  attempt  at  the  outset 
shows  that  small  belief  could  be  placed  in  anything  that 
he  might  say  or  promise  later,  if  he  were  permitted  to 
buy  goods  on  time.  Signing  a  false  statement  in  order 
to  form  the  credit  man's  decision  can  be  made  a  basis 
for  legal  action,  there  being  an  intent  to  defraud. 

In  the  early  days  of  scientific  credit-granting,  it  was 
customary  to  include  in  tlie  statement  blank  every  kind 
of  question  recognizable.  In  some  cases  hundreds  of 
queries  in  small  type  were  inserted.  The  confusing  effect 
on  the  business  man  who  received  one  of  these  blanks  is 
apparent.  Often  he  was  actually  afraid  to  sign  it.  The 
modern  tendency  is  to  simplify  the  statement  blank,  mak- 
ing it  easy  to  understand  and  sign.  After  a  man  has 
once  signed  such  a  statement,  it  is  easy  for  the  diplomatic 
credit  man  to  get  further  information.  The  customer 
finds  difficulty  in  refusing  additional  data  because  he 
has  put  himself  on  record  as  being  wilhng  to  furnish 


Sources  of  Credit  Information 


43 


PROPERTY    STATEMENT    BLANK 

Adopted  and  Recominended  by  the  National  Association  si  Credit  Men 

RICHMAN    a    CO^    NCW    YORK,    N.    V. 

For  the  purpoM  of  obtcilnlna  credit  and  to  lndu< 


RECORD     OF     ALL     HEAL     ESTATB    OWNED 

TnuB  m  Namk  op 

DMcairriON  akd  Location- 

VALim 

?%iiTr 

^"SJ^ 



Do  7DU  pledge  or  mI)  joat  •ccouoti  t 

II  lo,  what  Afflonnt  ire  lo  pledfcdL 
Wbal  OJOBiit  of  rear  ftceoanU  or 

pledged  or  9olJ  dw4as  the  p*it  twetrc  -"">*■*> 

Asy  chattel  '"'■^tr't"^  T»  wbomf .  — i,.,     . 

Wbeo  did  TCm  commence  preaent  *■"■""■* 

AmoTtiil  oi  Iwt  Tcaf '■  "1^ 

An  there  knr  ladfmeatg  cm  &)e  aKusBt  r'**'  Art  tb 

What  ■Bumot of  commiatton  foods  h*vt  yit  on  *^"«*f 

Have  yov  uty  kidebtcdneM  lo  frindi  or  nlkMrt-i  not  atatpd  tbovc?. 


J  person  or  ptramul^ 


Formerly  eiiKaccd  fa 


Lost  r«<u'i  czpcDM  tk- 


The  toregnlax  sUiomcat  has  been  cnnr^iiJl;  read  (boUi  tl 

ir«  to  n:£ud  tbis  u  a  ceatiDoiog  atateme 


Wtitrt  Uck  of  ap4c«  prcvetita 


>I  membcn  comprlainc  fino,  or  officers  U  a  cerporatk^k 


■•  m  tt  On  •  Coopkto  Lbl  »( loam  Tm  DmI  tHb  Mtf  inomt  Mof  Cnb  Oh  «  rmm  ttdi  tf  this  lAwl 


Fig.  9. — Combined  Statement  and  Mailing  Envelope 


44  Credits 

facts    regarding   liis    business,    and    cannot    gracefully 
change  his  attitude. 

The  scope  and  variety  of  the  information  that  the 
signed  statement  is  intended  to  bring  out  can  be  gathered 
from  the  forms  at  the  end  of  this  chapter.  They  are  a 
product  of  long  experience  and,  if  properly  answered, 
elicit  every  useful  fact  that  the  credit  man  needs  for  his 
pui*pose.  Business  men  solicit  the  opportunity  of  fur- 
nishing agencies  with  the  information  that  is  to  be  the 
basis  of  their  ratings.  Similarly,  the  signed  statement 
requested  by  the  wholesale  house  or  manufacturer  should 
be  regarded  as  the  occason  for  securing  recognition,  and 
hence  should  be  made  full,  explicit,  and  conservative, 
bearing  evidence  of  its  truthfulness  and  accuracy,  since 
otherwise  it  cannot  serve  in  the  support  of  future  busi- 
ness esteem. 

CoiSrCLUSION 

The  foregoing  completes  the  catalog  of  usual  sources 
of  credit  information,  together  with  a  description  of 
each.  That  there  are  other  sources  cannot  be  denied. 
They  are,  however,  not  so  general  in  their  nature,  and 
are  used  by  the  credit  man  at  rare  intervals  or  in  unusual 
situations.  It  would  be  profitless  to  go  any  farther  into 
this  subject,  except  to  say  that  the  credit  man  must 
always  be  absolutely  ''hungry"  for  information.  He 
must  be  forever  reaching  out  for  more  information,  and 
ever  seeking  new  sources  through  which  he  can  obtain  it. 

TEST  QUESTIONS 

1.  From  what  sources  do  the  mercantile  agencies  obtain  their 
information  ? 

2.  What  two  kinds  of  information  are  given  by  an  agency 
rating? 


Sources  of  Credit  Information  45 

3.  Under  what  circumstances  are  banks  good  sources  of  credit 
information  ? 

4.  Wherein  is  a  salesman's  credit  report  valuable,  and  wherein 
is  it  valueless? 

5.  What  is  the  best  kind  of  information  that  the  credit  man 
obtains  from  a  face  to  face  talk  with  the  credit  seeker  ? 


CHAPTER  IV 

HANDLING   CREDIT   INFORMATION 

It  is  easily  seen  that  it  would  be  impossible  for  tlie 
credit  man  to  investigate  every  applicant  through  all  the 
sources  which  we  have  discussed.  The  mass  of  data 
would  be  too  unwieldly,  and  a  great  deal  of  the  informa- 
tion received  through  one  source  would  be  duplicated  by 
that  coming  from  other  sources. 

It  appears  essential,  therefore,  for  the  proper  guidance 
of  the  credit  man,  that  these  sources  of  credit  informa- 
tion be  classified  according  to  the  kind  of  information 
which  they  can  best  furnish.  If,  for  instance,  we  find 
that  the  salesman  can  furnish  excellent  and  trustworthy 
reports  regarding  the  proposed  customer's  business 
ability,  that  a  financial  statement  direct  from  the  cus- 
tomer is  undoubtedly  the  best  way  to  uncover  facts 
regarding  his  net  worth,  and  also  that  the  local  bank  can 
give  us  an  accurate  estimate  of  his  character,  we  have 
covered  the  entire  field  of  information  which  we  desire. 

It  would  be  absurd  to  obtain  all  our  information  from 
sources  which  were  particularly  explicit  regarding  the 
capital  element,  and  more  or  less  to  neglect  the  other  two 
important  factors  of  character  and  abihty.  The  infor- 
mation we  get  must  be  well  balanced.  We  can  only  pur- 
sue our  investigation  intelligently  if  we  know  just  what 
kind  of  information  each  source  is  best  able  to  furnish. 
Some  sources  of  credit  information  like  Bradstreet  and 
Dun  cover,  rather  completely,  all  three  of  the  credit 

46 


Handling  Credit  Information 


47 


Character  Abiljtt  Capital 

R.  G.  Dun  &  Co.  R.  G.  Dun  &  Co.  r.  g.  dun  &  co. 

Bradstreet  Bradstreet  bradstreet 

Other  mere,  agencies    Other  mere,  agencies    other  merc.   agen- 
cies 


BANKS 

Paper  brokers 

local  business  men  Local  business  men 

trade  references  Trade  references 

collection       agen-  Collection  agencies 

CIES 


Banks 

paper  brokers 

trade  references 


N.  A.  C.  M. 

Customer's  letters 
VISIT  to  customer 


N.  A.  C.  M. 

SALESMEN 

VISIT  TO  CUSTOMER 


customer's  LETTERS 

CORP.   MANUALS 
FINANCIAL    PAPERS 


Explanation. — One  source  of  information,  such  as  ' '  Bradstreet, ' '  may 
appear  in  all  three  columns.  This  means  that  Bradstreet  is  able  to  furnish 
information  of  value  bearing  on  all  three  elements.  In  one  of  the  three 
columns  you  will  note  that  the  name  is  capitalized,  which  indicates  that 
Bradstreet  is  particularly  well  equipped  to  give  information  regarding  the 
capital  element.  Where  the  same  name  is  capitalized  in  two  columns,  it 
means  that  the  source  can  be  depended  upon  to  give  a  good  line  of  informa- 
tion regarding  both  the  elements. 

Fig.  10. — Classification  of  Information  Sources 
Showing  which  kind  of  Information  they  are  beat  able  to  furnish. 


factors,  but  even  these  two  institutions  are  better  able 
to  report  on  a  company's  financial  standing  than  they 
are  on  the  character  and  ability  of  its  officers  and  di- 
rectors. This  is  because  the  financial  information  is 
rather  easily  obtained  by  the  mercantile  agency  reporter, 
both  from  the  customer  and  from  the  official  records. 


48  Credits 

such  as  the  tax  assessors'  and  the  tax  collectors'  books, 
the  registry  of  deeds  and  mortgages,  etc.  On  the  other 
band,  the  local  business  man  of  whom  we  may  inquire 
is  in  a  position  to  disclose  accurate  information  regard- 
ing the  character  of  the  person  inquired  on,  while  his 
estimate  of  the  net  worth  and  financial  standing  may  be 
inaccurate. 

Classification  of  Sources 

In  Figure  10  we  have  classified  the  various  information 
sources  and  have  shown  Avhich  kind  of  information  they 
are  best  able  to  furnish.  Such  an  analysis  at  best  can 
serve  only  as  a  guide.  Every  credit  man  wall  have  to 
figure  the  thing  out  for  himself,  and  probably  no  two 
credit  men  will  agree  as  to  the  value  of  different  kinds 
of  information.  No  cast-iron  rules  can  be  laid  down, 
and  the  reader  is  Avarned  to  accept  this  chart  merely  as 
an  expression  of  one  credit  man's  opinion.  Some  such 
analysis,  however,  should  always  be  made  when  the  size 
of  the  credit  department  justifies  it.  Experience  will 
soon  show  the  proper  classification  for  any  particular 
line  of  business. 

In  this  connection,  it  raay  be  well  to  note  for  future 
reference  that  there  are  a  number  of  excellent  sources 
of  information  regarding  the  capital  and  character  fac- 
tors, but  that  on  the  ability  side  the  really  reliable  and 
important  sources  are  few.  This  will  be  discussed  in 
detail  later.  , 

Comparison  of  Credit  Factors 

To  a  man  who  is  more  or  less  familiar  with  credits,  a 
certain  portion  of  our  theory  of  credit  may  appear 
strange.  We  have  laid  particular  stress  on  the  two  per- 
sonal credit  factors,  namely,  character  and  ability,  and 


Handling  Credit  Information  49 

have  said  that  the  capital  element  was  not  of  the  same 
nature  as  the  other  two,  but,  in  reality,  was  in  the  nature 
of  insurance  against  external  factors  which  could  not 
be  foreseen.  The  reader  possibly  knows  that  most  credit 
men  emphasize  the  capital  factor  very  strongly  in  their 
investigations,  and  that  a  customer's  net  worth  and 
sound  financial  condition  will  obtain  for  him  a  large 
amount  of  credit,  where  if  he  had  only  excellent  char- 
acter and  ability  to  back  him,  he  might  be  restricted  in 
his  ability  to  purchase  on  time. 

There  is  no  contradiction  involved,  although  at  first 
sight  there  seems  to  be.  With  the  large  volume  of  credit 
transactions  which  pass  through  the  modern  business 
house,  it  is  often  impossible  to  obtain  what  is  known  to 
be  accurate  and  detailed  information  regarding  the  two 
personal  elements  of  character  and  ability.  The  credit 
man  may  be  able  to  learn  in  a  general  way  that  the  cus- 
tomer has  always  been  recognized  as  a  man  of  high 
character,  and  that  his  associates  and  acquaintances  and 
the  salesman  for  the  house  regard  him  as  a  man  of 
marked  ability,  but  this  is  not  first-hand  information,  nor 
can  it  be  relied  upon  too  far. 

Character  and  ability  are  such  intangible  things,  and 
so  incapable  of  being  measured  and  charted,  that  it  is 
really  far  easier,  and  possibly  more  satisfactory  in  the 
long  run,  for  the  credit  man  to  look  closely  into  the  cus- 
tomer's financial  condition,  which  in  most  cases  can  be 
determined  with  a  considerable  degree  of  accuracy.  We 
wish  to  emphasize  right  here  that  this  is  not  because 
the  credit  man  fails  to  recognize  the  overwhelming  im- 
portance of  character  and  ability,  but  because  he  is 
unable  to  get  the  same  close  accurate  information  regard- 
ing them,  that  he  can  obtain  in  regard  to  the  financial 
condition. 


50  Credits  y 

Furthermore,  most  credit  men  recognize  that  the 
financial  condition  of  a  company  is  one  of  the  best  ways 
of  measuring  the  character  and  ability  factors.  The  line 
of  reasoning  which  leads  to  this  conclusion  is,  of  course, 
simple.  Given  a  man  possessing  high  character  and 
marked  business  ability,  it  would  be  strange  if  he  did  not 
make  money,  and  in  a  rough  way  it  can  be  stated  that  the 
higher  his  character  and  ability  run  the  better  will  be 
his  financial  condition.  Unfortunately  for  the  credit 
man,  however,  it  is  not  true  that  large  earnings,  and 
therefore  a  favorable  capital  factor,  always  measure 
character.  Crooks,  if  possessed  of  good  business  ability, 
can  often  accumulate  means  rapidly,  but  of  course  their 
prosperity  is  not  on  a  sound  footing.  They  are,  there- 
fore, dangerous  for  the  credit  man  to  do  business  with. 
We  can,  however,  without  fear  of  contradiction  state 
that  in  nearly  every  case  large  earnings  are  indicative 
of  marked  ability,  and  that  they  may  he  indicative  of 
high  character,  'particularly  if  the  business  has  been 
running  for  a  period  of  years. 

How  about  the  man  who  is  just  starting  in  business, 
who  starts  with  no  capital,  and  whose  ability  cannot  be 
measured  by  his  earnings  because  they  are  all  in  the 
future  ?  We  must  study  such  an  applicant  for  credit  with 
the  greatest  of  care.  We  must  investigate  every  infor- 
mation source  to  determine  the  degree  of  his  ability  and 
character.  If  we  find  that  he  is  possessed  of  both  in 
an  miusually  attractive  way,  we  may  safely  extend  him 
credit  for  his  requirements. 

In  this  kind  of  a  situation,  the  credit  man  has  an  op- 
portunity to  perform  a  reallj^  constructive  work.  The 
top-notch  credit  men  in  the  United  States  do  this  all  tlio 
time.  They  are  actually  on  the  hunt  for  customers  who 
possess  to   an  extraordinary  degree  the  two  personal 


Handling  Credit  Information  51 

credit  factors.  Then,  by  good  counsel,  and.  even  more 
by  material  assistance,  they  bind  this  desirable  customer 
to  their  house  with  unbreakable  ties,  so  that  when  he 
becomes  a  large  and  much  sought-after  buyer  he  con- 
tinues to  trade  with  his  old  friends  who  started  him  in 
business,  turning  a  deaf  ear  to  the  other  wholesalers,  or 
manufacturers,  as  the  case  may  be,  who  did  not  seek  his 
business  until  he  became  wealthy  and  influential. 

Credit  Files 

To  come  back  to  our  subject,  we  have  seen  that  through 
various  sources  there  comes  to  the  credit  man  each  day 
great  masses  of  information.  This  information  must  be 
handled  systematically,  and  so  preserved  that  it  may 
be  efficiently  used.  This  brings  us  to  the  subject  of  credit 
files.  It  is  important  to  recognize  at  the  outset  that  when 
we  speak  of  credit  files,  we  refer  to  all  means  of  pre- 
serving and  classifying  credit  information  in  a  con- 
venient and  compact  form.  We  must  look  at  the  purpose 
and  disregard  the  form,  at  least  for  the  present. 

Classification  by  Customers 

The  information  must  be  classified  according  to  cus- 
tomers. The  credit  man  must  be  able  to  go  to  a  given 
file  or  cabinet  and  obtain  in  one  file-jacket,  or  in  one 
envelope,  or  on  one  card  all  the  information  which  has 
been  received  regarding  the  customer.  This  means  that 
we  must  consolidate  all  the  information  which  comes 
from  the  Bradstreet  Company,  K.  G.  Dun  &  Company, 
various  banks,  etc.,  regarding  John  Smith's  credit  stand- 
ing in  John  Smith's  credit  file. 

In  all  but  the  small  business  houses  the  mass  of  orig- 
inal information  becomes  so  great,  after  a  few  years' 
time,  that  it  is  necessary  to  boil  it  down  in  some  compact 


52  Credits 

and  efficient  way.     No  credit  man  has  the  time  to  run 

through  and  study  carefully  a  great  mass  of  bank  letters, 
agency  reports,  salesman's  reports,  etc.,  which  have  been 
accumulating,  perhaps  for  years,  in  a  credit  file.  He 
must  have  the  really  important  facts  summarized,  and 
thus  do  away  with  all  unimportant  and  dupUcated 
matter. 

Just  ho^v  this  should  be  handled  depends  upon  the 
size  of  the  credit  department  and  the  volume  of  business 
which  it  handles.  But  that  it  should  be  done  cannot  suc- 
cessfully be  denied.  Of  course,  for  the  country  store- 
keeper an  elaborate  credit  department  would  be  absurd, 
but  for  the  ordinarj^  wholesaler  and  manufacturer,  cer- 
tain principles  for  utilizing  information  should  be 
recognized. 

Cl..4lSsification  of  Information 

The  first  general  principle  which  should  be  recognized 
in  some  way  or  another  is  that  in  summarizing  informa- 
tion it  should  be  done  according  to  the  three  classes — 
character,  ability,  and  capital.  Whether  this  is  done  by 
actually  cutting  the  information  up  into  three  separate 
parts,  or  whether  it  is  done  by  summarizing  information 
on  three  separate  sheets  or  in  three  separate  columns, 
is  unimportant.  Indeed,  one  of  the  most  effective  credit- 
file  arrangements  which  we  know  anything  of  handles 
these  various  classes  of  information  on  the  summary 
sheet  as  follows.  Each  time  a  batch  of  information  is 
summarized,  character  elements  are  first  treated,  then 
those  bearing  on  ability,  and  lastly,  those  having  to  do 
with  capital.  No  fonnal  attempt  is  made  to  separate 
them,  but  they  are  always  kept  in  the  same  order,  and 
if  the  credit  man  desires  to  make  a  study  of  a  particular 
customer's  ability,  he  knows  that  in  the  middle  section 


Handling  Credit  Information  53 

of  eaxjh  write-up  he  can  find  information  bearing  on  that 
quality. 

The  next  credit-file  feature  of  importance  is  to  have 
all  unfavorable  information  so  indicated  that  it  will 
catch  the  credit  man 's  eye  unfailingly.  It  makes  no  dif- 
ference whether  we  have  all  such  unfavorable  informa- 
tion written  in  capitals,  or  underlined,  or  emphasized  by 
the  use  of  different-colored  inks.  It  should  be  so  easily 
seen  that  there  can  be  no  excuse  for  overlooking  it.  The 
reason  for  this  is  that  it  is  rare  for  the  credit  man  to 
refuse  credit  to  a  customer  without  carefully  going 
through  all  the  available  information,  but  unfortunately 
during  rush  periods  he  may  approve  business,  which, 
if  he  had  considered  carefully,  he  would  have  turned 
down. 

The  next  point  which  all  credit  files  should  have  in 
common  has  to  do  with  financial  statements.  Wlien 
financial  statements  are  received  through  the  various 
sources  they  frequently  come  in  unusual  form,  and  it 
is  necessary  to  standardize  them.  This  can  be  done  by 
rewriting  the  statement  on  a  standard  blank  form.  Then, 
when  the  following  year's  statement  is  received,  it  can 
also  be  written  on  the  same  blank  form  in  an  adjacent 
column.  When  two  or  more  statements  are  on  file,  the 
credit  man  is  able  to  make  invaluable  comparisons. 

A  sample  of  a  convenient  classification  blank  is  shown 
in  Figure  20,  page  100.  In  studying  this  blank,  you 
will  note  that  near  the  bottom  a  summary  is  provided 
showing  the  liquid  assets,  which  consist  of  cash  and 
notes  and  accounts  receivable  and  under  which  is  shown 
a  total  of  current  liabilities,  and  that  to  the  difference 
between  these  two  figures  is  added  the  inventory  items, 
giving  the  net  quick  assets. 

It  is  obvious  that  working  a  large  volume  of  informa- 


54  Credits 

tion  into  shape  requires  considerable  labor  and  some 
ability.  In  a  credit  department  of  size,  however,  the 
results  justify  the  expenditure  of  time  and  money. 

Record  of  Past  Dealings 

Finally,  the  credit  files  should  provide  for  some  record 
of  the  customer's  past  dealings  with  the  house.  This 
should  be  in  a  convenient  form,  should  be  easily  acces- 
sible, and  should  show  the  volume  of  business  which  is 
transacted  with  the  customer  according  to  years  and 
months,  the  maximum  of  indebtedness  during  each  fiscal 
period,  and  the  promptness  "svith  which  the  customer 
paid  his  accounts. 

Miscellaneous  Files 

In  certain  lines  of  business  a  credit  file  should  be  sup- 
plemented by  explicit  records  on  customer's  references 
and  banks  and  the  attorneys  supplying  information  in 
answer  to  special  inquiries  as  to  standing  and  reliability. 
These  supplementary  records,  whether  in  card,  envelope, 
or  ledger  form,  should  have  under  the  name  of  each  indi- 
vidual, institution,  firm,  or  attorney,  a  list  of  all  persons 
reported  on,  and  the  entry  should  be  made  to  show  in 
how  far  the  information  received  is  reliable. 

In  the  case  of  a  house  handling  a  large  volume  of  busi- 
ness distributed  over  a  wide  territory,  a  record  by  states, 
cities,  and  towns  is  imperatively  demanded,  for  it  is  often 
as  necessary  to  look  up  the  status  of  the  section  or  town 
as  it  is  to  discover  the  standing  of  a  man  doing  business 
there. 

In  every  business  the  filing  system  should  be  adapted 
to  the  particular  needs  of  the  business.  To  prescribe  any 
specific  ''system"  would  be  as  senseless  as  to  prescribe 
medicine  without  having  made  a  diagnosis.     "We  have 


Handling  Credit  Information  55 

attempted  to  indicate  a  few  practical  tests  for  the  serv- 
ices that  should  be  rendered  by  a  good  credit  filing 
system. 

Relation  of  Ceedit  to  Othek  Depaetments 

This  chapter  would  be  incomplete  without  some  treat- 
ment of  the  way  in  which  a  credit  department  keeps  track 
of  various  customers'  accounts.  In  some  lines  of  busi- 
ness a  loose-leaf  book  may  be  kept  containing  a  ledger 
sheet  for  each  customer.  We  have  reproduced  such  a 
sheet  in  Figure  11.  Each  sheet  is  headed  with  the  name 
and  address  of  a  customer,  with  his  file  number  shown 
in  the  upper  left-hand  corner,  and  with  his  present  terms 
and  credit  limit  indicated  in  the  space  provided.  Debits 
to  these  various  accounts  come  from  carbons  of  the  cus- 
tomer's statements,  the  originals  of  which  are  sent  out 
by  the  bookkeeping  department  to  the  customers.  On 
the  first  of  each  month  these  carbons  are  referred  to 
the  credit  man.  He  posts  the  month's  account  opposite 
the  proper  month  and  in  the  column  under  the  words 
''total  sales."  On  the  extreme  right-hand  side  under  the 
words  ' '  monthly  balance ' '  is  put  the  total  of  the  account. 
To  illustrate,  suppose  that  on  the  first  of  June  a  state- 
ment shows  $1,000  bearing  April  dating  and  a  $1,000 
bearing  May  dating.  We  pay  no  attention  to  the  April 
item  which  was  handled  the  previous  month,  but  opposite 
the  word  May  we  post  the  amount  of  $1,000.  Keeping 
on  the  same  line  but  on  the  right-hand  side  of  the  page 
and  under  the  words  "monthly  balance,"  we  post  not 
$1,000,  but  the  total  of  the  account,  $2,000.  We  keep 
the  record  in  this  way  in  order  that  we  can  see  at  a 
glance  what  has  been  the  highest  amount  of  credit  that 
we  extended  to  our  customer. 

The  bookkeeping  department  reports  to  the  credit  de- 


56  Credits 

partment  all  remittances  received  each  day.  These 
various  remittances  are  posted  to  the  appropriate  sheets 
in  one  of  the  four  columns  under  the  words  "how  paid." 
Of  course,  they  must  be  posted  on  the  same  line  as  the 
debit  which  they  offset.  The  four  narrow  columns  shown 
under  the  words  '*bow  paid"  are  used  to  contain  figures 
shomng  how  promptly  the  account  was  paid.  If  a  Jan- 
uary 15  account  amounting  to  $100  is  paid  on  February 
15,  terms  30  days,  we  should  put  in  one  of  the  four  pay- 
ment columns  the  date  and  the  amount  paid,  $100,  and 
in  the  narrow  column  a  zero,  showing  that  there  was  no 
slowness.  If,  however,  the  same  January  15  account 
should  not  be  paid  until  February  20,  the  figure  5  would 
be  inserted  in  that  narrow  column,  indicating  that  the 
payment  was  five  days  slow. 

At  the  end  of  the  calendar  year  all  the  debits  are 
totaled  on  the  bottom  of  the  sheet.  The  right-hand  col- 
umn under  the  words  ''monthly  balance"  is  scanned,  and 
the  highest  figure  shown  therein  is  noted  and  transferred 
to  next  year's  sheet  in  the  upper  right-hand  column,  im- 
mediately under  the  words  ''monthly  balance"  and  in 
line  with  the  words  "previous  year."  Total  debits  are 
transferred  to  the  new  sheet,  under  "total  sales"  and 
opposite  ' '  previous  year. ' '  And  on  the  same  line  under 
the  words  "how  paid,"  we  may  put  in  a  brief  memo- 
randum describing  in  a  general  way  the  customer's 
manner  of  payment  during  the  past  year.  These  sheets 
contain  the  current  year's  experience  and  a  summary  of 
the  previous  year's  experience.  The  old  sheet  is  filed 
permanently  in  the  customer's  credit  file. 

The  bookkeeping  department  is  expected  to  indicate 
through  what  bank  the  customer's  check  was  made  pay- 
able. The  names  of  these  banks  are  posted  in  the  upper 
right-hand  comer  of  the  ledger  sheet.    By  glancing  at 


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Handlmg  Credit  Information  57 

his  sheet  we  can  know  what  bank  the  customer  does  busi- 
ness with,  and  write  the  bank  a  letter  asking  for  late 
information. 

The  procedure  here  indicated  Avith  regard  to  this  credit 
department  "ledger"  would  involve  too  much  red  tape 
for  any  but  those  concerns  which  actually  need  such  in- 
formation in  readily  accessible  shape.  For  the  sake  of 
completeness,  it  is  described  in  this  volume,  but  the 
authors  feel  that  they  would  fail  in  their  duty  did  they 
not  warn  the  reader  against  uselessly  multiplying 
records. 

Eecords  such  as  these  cost  money — often  a  great  deal 
of  money — and  they  should  not  be  kept  unless  their  use- 
fulness is  demonstrable  without  a  shadow  of  a  doubt. 
The  credit  man  should  conduct  his  department  with 
minimum  losses,  minimum  orders  declined,  and  minimum 
expense.  These  are  the  ultimate  tests  of  a  credit  man's 
success.  In  studying  this  and  other  chapters,  these 
standards  should  ever  be  borne  in  mind.  Useless  infor- 
mation should  never  be  purchased,  and  useless  records 
should  never  be  kept,  or  the  credit  man  will  degenerate 
from  the  constructive  executive  to  the  '* system"  crank 
— hopelessly  tied  up  in  his  own  red  tape. 

TEST  QUESTIONS 

1.  (a)  What  is  one  of  the  best  sources  of  information  regard- 
ing a  customer 's  abihty  ? 

(b)  Regarding  his  capital? 

(c)  Regarding  his  honesty? 

2.  What  is  the  purpose  of  the  credit  file  ? 

3.  When  is  it  worth  while  to  summarize  or  "boil-down"  credit 
information,  taking  into  consideration  the  expense  of  doing  so  ? 

4.  How  should  credit  information  be  classified  in  the  file  and 
why? 


CHAPTER  V 

USING   THE   INFORMATION 

We  saw  in  the  last  chapter  that  the  great  volume  of 
information  which  comes  to  the  credit  department  must 
be  so  classified  and  distributed  that  all  data  bearing  on 
the  credit  of  any  customer  may  be  located  in  one  file,  and 
that  the  matter  in  this  file  should  be  arranged  in  an 
orderly  fashion.  The  next  point  of  importance  whicli 
we  must  consider  is  how  this  information  cau  be  used. 
The  primary  reason  for  collecting  it  is  to  give  the  credit 
man  something  definite  to  go  on  when  he  decides  whether 
or  not  a  given  person  or  concern  is  to  be  sold  goods  on 
time. 

Teems  of  Sale 

Nearly  every  line  of  business  has  a  set  policy  as  to 
** terms  of  sale"  on  the  varying  line  of  goods  which  it 
carries.  The  "terms  of  sale"  refer  directly  to  the  ar- 
rangement which  the  credit  department  makes  Avith  the 
customer  as  to  time  of  payment.  A  common  quotation  of 
terms  in  many  lines  of  business  is  '*30  days."  This 
means  that  the  customer  is  to  pay  for  the  commodities 
he  purchases  wdthin  30  days  after  date  of  their  ship- 
ment. Customary  rates  of  discount  for  cash  payments 
have  been  established  in  most  lines  of  business.  These 
rates  vary.  Usually,  the  longer  the  tenn  of  credit  the 
higher  the  discount,  because  the  greater  the  risk.  The 
rates  of  discount  cover  losses. 

58 


Using  the  Information  59 

A  few  words  of  caution  will  not  be  inappropriate.  The 
advantage  of  taking  these  discounts,  where  working  cap- 
ital will  permit,  is  often  overlooked.  If  the  merchant 
is  in  good  standing  at  a  bank,  he  may  even  profit  by 
arranging  credit  there,  because  bank  rates  of  interest 
are  lower  than  the  rates  charged  by  lenders  of  mer- 
chandise. There  is  hardly  any  line  of  business  in  which, 
considering  turnovers,  the  discount  for  a  year  does  not 
amount  to  anywhere  from  12  to  18  per  cent,  and  in  some 
cases  even  more.  These  discounts  may  represent  the 
difference  between  profit  and  loss  at  the  close  of  the  year, 
and  in  all  cases  they  add  to  the  profits.  The  aim  should 
be  at  large  sales,  quick  turnovers,  and  full  discounts. 

In  this  same  connection  reference  should  be  made  to 
the  custom  of  dating  ahead.  This  practice  grew  out  of 
the  efforts  to  induce  wholesalers,  jobbers,  and  retailers 
to  make  their  purchases  of  seasonal  lines  long  before  the 
actual  shipment,  say  30  or  60  days.  Generally  the  regu- 
lar trade  terms  become  operative  after  this  date.  Thus, 
goods  may  be  purchased  in  January,  dated  in  March, 
and,  on  30-day  terms,  become  payable  in  April. 

It  is  important  to  note  that  the  phrase  ''terms  of 
sale ' '  does  not  necessarily  refer  to  the  time  which  is  al- 
lowed the  customer,  but  to  the  arrangement  between 
the  buyer  and  the  seller  as  to  payment.  Goods  may  be 
sold  on  a  cash  basis,  no  time  being  allowed.  In  this 
case  the  terms  of  sale  are  ''cash  with  order,"  and  the 
customer  must  pay  for  goods  before  he  receives  them. 

Rules  Concerning  Time 

The  time  allowed  by  the  terms  of  sale  may  vary  all  the 
way  from  a  day  or  two  to  as  much  as  a  year,  or  even 
longer.    The  factors  which  determine  the  terms  of  sale 


60  Credits 

in  the  various  kinds  of  business  for  different  com- 
modities deserve  some  discussion. 

For  example,  an  agricultural  implement  company  pur- 
chasing steel  from  a  rolling  mill  is  entitled  to,  and 
usually  receives,  terms  varying  from  six  months  to  a 
year.  A  small  railroad  purchasing  steel  rails  from  the 
same  company  will  probably  be  asked  to  pay  cash,  the 
terms  quoted  being  "sight  draft  against  B/L"  which 
simply  means  that  before  the  rails  will  be  delivered  the 
customer  must  pay  draft  drawn  on  him  by  the  rolling 
mill  before  the  bill  of  lading  will  be  released.  Since  in 
this  case  the  customer  cannot  obtain  the  rails  \^dthout 
surrendering  the  B/L,  cash  is  actually  paid  in  advance. 

In  this  connection  you  should  note  that  there  is  an 
element  of  risk  in  shipping  even  on  these  terms  if  the 
goods  are  special  in  nature,  or  if  the  distance  from  the 
shipper  to  the  customer  is  sufficiently  great  to  make 
high  freight  rates.  The  risk  is  that  the  customer  may 
refuse  to  receipt  the  shipment,  alleging  lack  of  money 
or  change  in  mind.  His  idea,  of  course,  is  to  effect  a 
compromise  settlement  with  the  shipper.  In  the  case 
of  standard  cormnodities  like  coal  the  danger  is  less,  since 
if  the  consignee  refuses  the  shipment,  it  may  be  disposed 
of  with  little  or  no  loss  to  others.  Where  the  goods  are 
* '  special, ' '  made  to  order  or  otherwise  not  easily  market- 
able, it  is  often  wise  to  obtain  a  substantial  cash  pay- 
ment in  advance. 

Assume,  for  example,  that  the  agricultural  implement- 
manufacturer  and  the  small  railroad  have  an  equally 
high  credit  standing.  Why  should  the  one  be  allowed 
so  much  time  in  which  to  pay  for  material  and  the  other 
be  allowed  no  time  at  all?  Or,  take  another  example: 
Coal  mines  usually  sell  considerable  tonnage  to  so-called 
'*coal  brokers,"  who  resell  it  again  to  retail  dealers. 


Using  the  Information  61 

The  customary  terms  are  30  days,  and  the  coal  broker  is 
expected  to  live  up  to  these  terms  strictly.  The  same 
coal,  if  shipped  in  the  spring  of  the  year  to  a  dealer 
located  in  an  agricultural  community,  may  carry  six 
months'  time. 

Why  should  such  conditions  exist? 

One  of  the  reasons  we  hinted  at  in  our  beginning 
chapter,  when  we  submitted  two  simple  credit  transac- 
tions for  analysis.  In  the  first  illustration,  when  Brown 
bought  coal  he  immediately  sold  it  to  his  customers,  and 
in  the  second  illustration,  when  he  bought  the  horse  and 
wagon  he  did  not  sell  it,  but  kept  it  in  Ms  business.  The 
horse  and  wagon  became  one  of  Brown's  permanent  as- 
sets. According  to  the  rules  of  credit,  Brown  should 
have  paid  for  the  horse  and  wagon  almost  at  once.  Be- 
fore buying  this  horse  and  wagon,  he  should  have  made 
arrangements  to  finance  his  purchase.  He  should  have 
entered  into  an  arrangement  with  a  money-lender  regard- 
ing the  mortgage  loan  before  he  actually  completed  the 
purchase. 

This  is  a  general  rule  in  nearly  every  business  trans- 
action involving  the  purchase  of  a  permanent  asset.  A 
railroad  wishing  to  extend  its  line  will  make  arrange- 
ments for  placing  a  bond  issue  before  completing  the 
purchase  for  rails.  Funds  should  be  available  to  pay 
for  the  rails  before  they  are  shipped,  since  the  seller 
cannot  justly  be  called  upon  to  finance  the  purchase  of 
fixed  assets.  That  is  the  function  of  the  bond  house  or 
the  financial  agent. 

In  our  second  simple  credit  transaction,  Green  could 
not  be  expected  to  take  a  mortgage  on  the  horse  and 
wagon  which  he  sold  to  Brown,  nor  could  he  be  expected 
to  wait  until  the  horse  and  wagon  could  be  paid  for  out 


62  Credits 

of  Brown's  earnings.  This  would  take  entirely  too  long 
a  time. 

Where  the  merchandise  moves  quickly,  as  in  the  first 
transaction,  it  will  be  turned  into  money  again  within 
a  reasonable  length  of  time,  and  payment  can  then  be 
made.  Smith  will  be  well  satisfied  to  make  his  sales  on 
such  a  basis  providing,  of  course,  that  Brown's  credit  is 
satisfactory.  The  same  line  of  reasoning  applies  in  the 
case  of  the  coal  broker  that  we  mentioned  in  a  preced- 
ing paragraph.  You  see,  then,  that  one  of  the  factors 
determining  the  terms  of  sale  is  the  use  to  which  the 
material  will  be  put.  The  man  who  buys  horses  and 
wagons  for  immediate  sale  will  demand  and  get  differ- 
ent terms  from  the  one  who  purchases  for  permanent 
investment. 

But  how  about  the  agricultural  implement-maker  who 
is  granted  a  long  time  in  which  to  pay  for  material? 
The  explanation  is  along  the  same  lines.  Implement- 
makers  sell  to  dealers  in  farming  communities.  Farmers 
can  only  pay  for  goods  purchased  when  they  have  sold 
their  crops.  Crops  can  be  sold  but  once  a  year.  This 
means  that  the  dealer  would  be  paid  but  once  a  year, 
and  that  he  can  pay  the  implement-manufacturer  but 
once  a  year.  The  implement-manufacturer  then  passes 
the  responsibility  on  to  his  source  of  supply.  The  terms 
of  sale  to  a  customer  ivill  bear  a  iv ell-defined  relation  to 
that  same  customer's  terms  of  sale  to  others.  This  nile 
applies  to  all  commodities  intended  for  resale.  The 
primary  object  of  mercantile  credit  is  to  enable  the  buyer 
to  pay  for  his  goods  from  the  proceeds  of  his  sales  ^vitll 
quick  transportation,  rapid  turnovers,  narrow  margins 
of  profit,  and  excellent  bank  accommodation  in  all  sec- 
tions of  the  countr)'' — the  natural  tendency  is  toward 
curtailing  the  time  of  credit. 


Using  the  Information  63 

The  seller,  however,  cannot  and  will  not,  in  the  ma- 
jority of  cases,  assume  banking  functions,  so  that  when 
the  article  purchased  is  not  to  be  resold,  but  is  to  be  re- 
tained as  a  permanent  asset  in  the  business,  the  buyer 
must  look  elsewhere  for  his  financing.  Funds  are 
promptly  obtained  through  the  negotiation  of  a  mortgage 
and  can  be  turned  over  to  the  seller  upon  the  receipt  of 
material. 

We  might  further  illustrate  our  theory  in  the  case 
of  a  contractor,  since  payments  by  contractors  are  ir- 
regular. The  contractor  constructing  a  building  pur- 
chases concrete  and  reinforcing  steel.  He  can  pay  for 
these  purchases  when  the  owner  of  the  building  pays 
liim.  The  majority  of  contractors  obtain  cash  from 
their  customers  every  month,  although  a  definite  per- 
centage of  the  amount  due  to  the  contractor  is  retained 
until  the  job  is  entirely  completed.  Should  there  be  any 
dispute  regarding  the  work  done  in  any  one  month,  it 
is  likely  that  the  contractor  will  not  get  his  remittance 
promptly.  If  this  is  true,  the  concrete  company  and  the 
steel  mill  can  be  pretty  sure  that  their  bills  for  that 
month  will  not  be  paid  promptly  either.  This  uncer- 
tainty regarding  a  definite  time  of  payment  is  taken  into 
consideration  when  selling  contractors. 

When  we  come  to  the  retailer,  terms  of  sale  are  often 
little  standardized.  The  applicant  comes  in  person, 
often  in  the  person  of  a  woman.  Credit  judgment,  in 
opening  the  account,  must  be  based  almost  exclusively 
upon  facts  that  can  be  learned  during  the  interview. 
Later  these  facts  may  be  checked  by  private  investiga- 
tion. Terms  differ  in  cities  and  rural  vicinities,  in 
one-crop  and  diversified  agricultural  regions,  etc.  In  a 
pay-roll  community  terms  are  adapted  to  the  payday 
periods.    There  is  a  tendency  to  place  30-day  (or  even 


64  Credits 

less)  limitations  on  running  accounts.  Limits  are  often 
placed  upon  the  amounts  of  monthly  credits  extended, 
varying  with  the  account  and  the  character  of  the  pur- 
chases. The  retailer's  credit  problems  call  for  eternal 
vigilance. 

We  have  tried  to  give  in  a  general  way  an  idea  of  how 
terms  of  sale  are  established.  No  definite  rule  can  be 
laid  do^vn  because  of  the  many  factors  which  may  be  of 
influence.  Competition,  for  instance,  often  does  strange 
things  to  establish  terms  of  sale.  Extended  time  will 
be  offered  to  the  trade  in  order  to  gain  patronage.  Last 
year,  in  a  certain  coal-mining  district  in  the  Mississippi 
Valley,  competition  became  very  intense.  Much  price- 
cutting  resulted  and,  what  was  even  worse,  trade  customs 
regarding  terms  were  upset.  Terms  of  6  months,  a  year, 
and  18  months  were  freely  offered.  Some  buyers  were 
told  that  they  could  have  coal  and  pay  for  it  whenever 
they  wanted  to.  Freights  were  prepaid  by  the  house  and 
long  periods  of  time  allowed  to  the  customers  to  repay 
them.  The  inevitable  result  of  this  kind  of  madness  is 
acute  financial  embarrassment.  Continuous  drains  on 
cash  with  no  returns  for  a  period  of  months  means  tlie 
tying  up  of  a  considerable  amount  of  capital  in  out- 
standing accounts,  which  are  not  liquid  as  they  should 
be.  Embarrassment  and  bankruptcy  will  surely  follow 
if  such  practices  are  long  continued. 

We  can  now  pass  from  the  discussion  of  terms  to  a 
consideration  of  how  the  credit  man  analyzes  the  situa- 
tion before  signing  terms.  No  definite  rules  can  ever 
be  laid  down  as  to  how  information  regarding  a  customer 
should  be  analyzed.  Only  general  instructions  can  be 
given. 

In  the  two  typical  credit  situations  mentioned  in  our 
first  chapter,  we  saw  that  our  analysis  of  Brown's  char- 


Using  the  Information  65 

aoter  and  business  ability  was  made  by  both  Smith  and 
Green.  We  also  noted  a  Uttle  later  on  that  a  third  ele- 
ment was  introduced,  namel}'',  capital.  The  credit  man 
analyzes  his  information  along  exactly  the  same  lines. 
He  studies  carefully  all  facts  bearing  on  the  customer's 
character.  In  case  the  customer  is  a  corporation,  which 
in  itself  can  have  no  character,  he  studies  those  facts 
bearing  on  the  character  of  its  officers  and  directors. 

AnaliYSIs  of  Chakacter 

Character  is  a  matter  of  honor,  both  business  and  per- 
sonal. From  the  credit  man's  point  of  view,  character 
measures  a  man's  intention  or  inclination  to  pay  his 
bills.  An  investigation  should  cover  a  customer's  past 
history,  and  must  determine  whether  it  has  always  been 
an  honorable  one.  A  customer's  personal  actions  and 
deportment  serve  as  a  reliable  index  to  his  character. 
If  the  customer  has  a  good  reputation  and  high  personal 
honor,  if  his  history  shows  that  he  has  never  been  en- 
gaged in  shady  transactions,  and  if  he  keeps  good  com- 
pany, we  may  feel  reasonably  sure  that  his  character  is 
all  it  should  be. 

The  credit  man's  eyes  are  open  to  many  tilings  that 
influence  his  estimates  negatively,  trifles  perhaps,  yet 
indications  of  business  irresponsibility :  a  chance  remark, 
an  approval  of  some  flagrant  swindle,  an  exhibition  of 
interest  in  municipal  graft,  or  an  expressed  willingness 
to  profit  by  it,  a  relish  for  newspaper  scandal,  the  inter- 
larding of  conversation  with  vulgarity — ^these  are  among 
the  irrelevant  things  on  which  the  credit  man  sometimes 
bases  his  refusal  of  credit. 

Frequently  an  undue  loudness  in  clothes,  or  a  disgust- 
ing display  of  jewelry  may  prejudice  an  applicant's 
chances   for  favorable   consideration,   so   disposed   are 


66  Credits 

credit  men  to  draw  specific  references  from  outward 
sliow.  TLe  writer  was  once  informed  that  a  boast  of 
having  evaded  the  payment  of  a  street-car  fare  led  to  a 
credit  man's  refusing  to  approve  a  sale  to  a  retail  mer- 
chant who  had  shown  himself  proof  to  all  usual  tests 
imposed.  In  the  interests  of  business  psychology,  this 
affair  should  have  been  carried  farther  by  investigating 
whether  this  jDarticular  instance  of  mthliolding  credit 
was  justified  by  the  retailer's  subsequent  thefts  on  a 
larger  scale,  but  even  if  this  had  been  the  case  it  would 
be  unwarrantable  to  found  a  general  procedure  on  an 
isolated  fact. 

Many  of  the  best  credit  men,  bankers,  and  financiers 
regard  character  as  the  most  important  element  of  the 
three  credit  factors.  The  late  J.  P.  Morgan  took  this 
stand,  and  it  is  said  that  he  often  made  loans  of  Jarge 
amounts  to  men  without  capital  when  they  possessed 
both  character  and  ability. 

Analysis  of  Ajbility 

When  the  credit  man  has  estimated  as  accurately  as  he 
can  the  character  of  his  customer,  he  must  then  consider 
his  ability.    He  must  obtain  the  answer  to  this  question. 

''Is  he  a  good  business  man?" 

This  means  a  well-rounded  business  man.  A  man  may 
be  brilliant  along  certain  technical  lines  and  still  fail 
miserably  in  financial  matters.  In  a  general  way,  we 
measure  a  man's  ability  by  his  personal  income  gained 
through  liis  own  activities.  The  way  in  which  he  was 
educated,  and  the  kind  of  experience  he  has  had,  throw 
interesting  light  on  the  subject.  These  things,  however, 
are  not  definite  enough.  The  credit  man  likes  to  be  able 
to  form  his  judgment  on  facts  rather  than  upon  vague 
impressions  and  opinions.    In  order  to  do  this,  he  must 


Using  the  Information  67 

be  a  specialist  in  many  lines  of  business.  He  should  be 
thoroughly  acquainted  with  every  line  of  business  in 
which  his  customers  are  engaged  so  that  he  can  study 
their  ability  through  their  accomplishments.  A  survey 
of  a  man's  factory  and  a  glance  at  his  records  will  show 
whether  the  man  is  able  or  inefficient. 

A  thorough  analysis  might  cover  the  customer's 
method  of  advertising,  the  location  and  the  size  of  his 
plant,  the  kind  and  the  number  of  machines  that  he 
uses,  the  cost  of  his  power,  the  system  of  his  organiza- 
tion, his  purchasing  and  selling  customs,  his  nearness  to 
supplies  of  raw  materials  and  to  his  markets,  his  account- 
ing and  bookkeeping  system,  and  so  on  almost  indefi- 
nitely. The  credit  man  tries  to  ascertain  whether  the 
customer  shows  good  sense  in  his  relations  with  his 
banks,  whether  he  overtrades  or  overbuys  or  pays  ex- 
cessive dividends,  whether  he  fails  to  take  favorable 
discounts  or  does  not  carry  fire,  life,  and  casualty  insur- 
ance, whether  he  preserves  a  proper  ratio  between  his 
trading  assets  and  liabilities,  what  his  ''turnover"  of 
goods  is  and  should  be,  and  whether  he  shows  economy, 
not  stinginess,  in  the  management  of  his  business. 

Analysis  of  Capital 

When  the  credit  man  has  fully  investigated  the  ability 
factor,  he  may  turn  his  attention  to  capital.  Here  he 
can  get  accurate  information  in  definite  units,  and  his 
analysis,  therefore,  will  be  less  cloudy  than  it  was  in 
connection  with  character  and  ability.  This  inquiry  tells 
the  credit  man  whether  the  customer  can  pay.  Pre- 
sumably, he  has  a  late  financial  statement  showing  as- 
sets and  liabilities  in  detail.  Possibly,  he  has  on  file  two, 
or  even  more,  such  statements  made  up  at  different  times. 
He  will  have  considerable  information  through  various 


68  Credits 

sources  explaining  the  figures  which  appear  in  the  state- 
ment. His  task  then  is  to  analyze  these  figures.  The 
figures  will,  of  course,  have  heen  arranged  to  suit  the 
standard  file  foim.  A  sample  of  such  an  arrangement 
is  shown  in  Figure  20,  page  100. 

The  first  one  starts  out  with  the  three  items:  (1) 
cash,  (2)  bills  receivable,  and  (3)  accounts  receivable. 
Space  is  left  for  the  total  to  be  taken  of  these  three 
amounts,  and  to  that  total  is  added  the  raw  material 
inventory  and  the  product,  merchandise,  and  supply 
inventories.  This  total  forms  the  quick  assets  of  the 
company.  Slow  assets  then  appear,  namely,  real  estate, 
buildings  and  plant,  space  being  left  so  that  other  assets, 
if  there  are  any,  may  appear. 

On  the  liability  side,  the  amount  of  accounts  payable 
and  bills  payable  (separated  into  three  sections  to  show 
where  they  are  owed)  are  totaled,  and  there  form  what 
is  known  as  the  current  liabilities.  To  this  we  add  the 
total  of  bonds  and  mortgages  and  reserves.  This  total 
plus  the  proprietorship  accounts,  namely,  capital,  stock, 
and  surplus,  equals  the  total  liabilities,  which,  of  course, 
should  balance  the  total  assets. 

These  reclassified  standard  statement  sheets  may  be 
made  up  in  almost  any  shape  or  form,  depending  upon 
the  nature  of  the  business  under  consideration  and  the 
particular  kind  of  information  which  they  are  intended 
to  emphasize. 

Of  course,  we  cannot  take  these  figures  at  their  face 
value  without  thorough  investigation.  Each  item  must 
be  carefully  scrutinized  to  determine  whether  it  actually 
is  what  it  represents  itself  to  be.  ''Cash"  should  be  cash 
only,  either  on  hand  or  in  the  bank.  The  item  should  be 
sufiiciently  large  to  balance  properly  the  statement  as  a 
whole,  but  if  it  is  too  large  it  shows  that  the  manager  is 
not  alive  to  his  opportunities.    It  is  obviously  foolish  to 


Using  the  Information  69 

carry  a  large  cash  balance  wMc-h  «arns  only  a  nominal 
return,  if  any,  when  it  could  be  turned  into  merchandise 
and  made  to  earn  a  substantial  profit.  One  rule  that  can 
be  definitely  laid  down  in  the  case  of  a  small  business  is 
that  cash  should  not  be  allowed  to  accumulate  as  long  as 
there  are  unpaid  debts  on  the  books. 

The  ''bills  receivable"  will  not  be  large  in  most  state- 
ments. It  is  still  a  custom,  however,  in  some  lines  of 
business  to  accept  notes  in  payment  for  merchandise. 
Where  a  large  amount  is  involved,  it  should  be  carefully 
analyzed  to  determine  what  it  is  worth  and  what  it  is 
made  up  of.  Often  under  this  classification,  we  find 
paper  that  has  been  renewed  several  times.  Often  we 
find  that  the  item  "bills  receivable"  covers  uncollectible 
items,  or  personal  obligations  of  the  officers  of  the  com- 
pany, or  notes  on  unpaid  stock  subscriptions. 

When  the  credit  man  is  satisfied  that  his  total  is  what 
it  purports  to  be,  he  should  examine  ''accounts  receiv- 
able." This  should  be  made  up  of  good  accounts  only, 
which  are  within  terms  or  nearly  so.  If  the  total  volume 
of  the  yearly  business  of  the  company  is  shown,  com- 
parison should  be  made  betv/een  the  two  items.  If  the 
sales  do  not  vary  greatly  from  month  to  month,  the 
comparison  mil  prove  a  reliable  index  as  to  the  efficiency 
of  the  collection  department.  A  concern  with  total  yearly 
sales  of  $12,000  and  total  accounts  receivable  of  $3,000 
is  often  spoken  of  as  being  on  a  "  3-months  basis, ' '  since 
three  months'  business  has  not  been  collected  for.  If 
their  accounts  receivable  had  been  $2,000,  they  would  be 
in  better  condition  as  far  as  collections  go.  In  other 
words,  in  a  normal  retail  business  the  accounts  receivable 
should  not  aggregate  more  than  two  months'  charges  or 
one-sixth  of  the  yearly  sales. 

This   standard  cannot  be   applied  too  vigorously  in 


70  Credits 

certain  sections  of  the  country.  In  the  cotton  states,  for 
example,  it  is  customary  for  the  country  storekeeper  to 
do  an  ''advancing"  business.  He  carries  the  small 
farmer  from  season  to  season,  supplying  him  with  mer- 
chandise and  other  necessities  and  taking  as  security  a 
mortgage  on  the  growing  crop,  and  often  on  the  real 
estate  and  livestock,  of  the  farmer.  In  such  cases  a 
financial  statement  may  show  total  sales  and  accounts 
receivable  approximately  equal.  This  is  not  danger- 
ous, however,  since  it  is  anticipated  and  prices  fixed 
accordingly. 

Where  this  state  of  affairs  is  not  anticipated,  an 
extremely  dangerous  situation  may  result  as  indicated 
in  the  following  example : 

DENVER  CLOTHES  SHOP 
Denver,  Colorado 

Assets 
Inventory  January  18,  1912 

Stock $29,443.86 

Accounts 16,686.29 

Bills  receivable 3,069.50 

Building  &  loan  stock 2,545.20 

Fixtures    6,249.95 

Total   $57,994.80    $57,994.80 

LlABnjTIES 

Merchandise  indebtedness.  ..$17,268.40 
Borrowed  money 17,500.00 

Total   $34,768.40       34,768.40 

Equity $23,226.40 

Sales,  1911 82,000.00 

Credit  sales  32,000.00 

Expense 20,000.00 


Using  the  Information  71 

The  foregoing  balance  sheet  and  statement  of  facts 
shows  the  serious  condition  that  this  merchant  has  per- 
mitted his  business  to  aasume,  because  of  his  excessive 
extensions  of  credit.  His  credit  sales  amount  to  $32,000 
a  year  or  approximately  $2,700  a  month.  At  the  time 
this  statement  was  made  his  accounts  receivable  showed 
the  total  charges  of  7  months — ^the  charges  for  7  months 
without  the  payment  of  a  dollar.  Of  course,  there  have 
been  moneys  paid  on  account  each  month.  Hence,  the 
length  of  time  accounts  have  been  running  is  much  longer 
than  7  months. 

In  this  line  of  business  and  taking  into  consideration 
the  financial  statement  as  offered,  the  accounts  receivable 
should  not  exceed  $5,500  to  $6,000.  If  this  were  true,  the 
owner  of  the  Denver  Clothes  Shop  would  have  over 
$13,000  to  reduce  his  indebtedness,  which  would  confine 
the  amount  he  owed  largely  to  his  borrowed  money.  As 
it  is,  the  business  is  in  a  very  precarious  condition  and 
is,  by  no  means,  entitled  to  credit. 

If  his  outstanding  accounts  receivable  were  on  a  proper 
basis,  he  would  owe  not  more  than  $4,000  merchandise 
indebtedness,  which  he  could  pay  in  less  than  a  month, 
but,  as  it  is,  it  would  take  nearly  3  months  to  pay  bills, 
which  should  have  been  paid  in  November  and  December, 
even  assuming  that  he  would  be  able  to  continue  his  bor- 
rowed money  loans. 

When  we  come  to  consider  the  two  inventory  items 
of  ' '  raw  material ' '  and  ' '  product,  merchandise,  and  sup- 
plies, ' '  we  find  ourselves  in  a  difficult  situation.  Do  these 
two  items,  in  reality,  represent  quick  assets?  What 
proportion  of  the  totals  consist  of  unsalable  items  ?  When 
the  inventory  was  taken,  were  cost  prices  used  or  selling 
prices?  It  is  well  for  the  credit  man  to  consider  what 
this  stock  of  raw  material  and  product  and  supplies  would 


72  Credits 

bring  in  the  eveiit  of  a  fotced  sale.  Too  often  the  credit 
man  has  to  make  a  heavy  deduction  from  the  face  of  such 
inventories. 

For  the  moment,  let  us  skip  over  the  real  estate  and 
plant  items  and  consider  the  liabihties.  It  is  obvious 
that  the  liabilities  will  never  be  overstated.  The  one 
question  we  shall  want  to  ask  about  the  accounts  payable 
is,  **What  proportion  of  them  are  past  duel"  This  will 
afford  an  index  to  the  customer's  habits  of  payment. 
We  want  to  know  in  a  general  way  to  whom  bills  payable 
are  owing.  This  will  tell  us  whether  they  are  notes  issued 
for  the  purpose  of  financing,  or  for  notes  given  in  pay- 
ment of  merchandise.  If  the  total  of  bills  payable  is 
heavy,  we  should  find  out  when  payments  must  be 
made  on  the  various  items  making  it  up. 

There  may  be  other  items  appearing  among  the  cur- 
rent liabilities,  such  as  pay  roll,  unpaid  dividends, 
discounted  bills  receivable,  etc.  "Where  these  appear  they 
must  be  investigated. 

We  can  now  compare  the  quick  assets  with  the  liabil- 
ities, and  it  is  on  this  comparison  that  the  credit  man 
relies  most.  The  total  of  ''cash"  and  the  "bills  and 
accounts  receivable"  are  kno^vn  as  "liquid  assets,"  and 
are  inserted  at  the  bottom  of  the  sheet  in  the  space 
shown.  Then,  under  them,  appears  the  total  of  the  cur- 
rent liabilities.  The  difference  is  taken  and,  if  the  liquid 
assets  are  larger  than  current  liabilities,  the  balance  is 
inserted  in  black.  If  the  current  liabilities  are  larger 
than  the  liquid  assets,  the  balance  is  shown  in  red,  indicat- 
ing a  deficit.  To  this  balance  is  added  the  total  of  the 
inventory  accounts,  and  the  final  result,  known  as  the"  net 
quick  assets,"  appears  on  the  bottom  line  (Figure  20). 

The  figures  showing  the  balance  between  the  liquid 
assets  and  the  current  liabilities,  and  those  showing  the 


Using  the  Information  73 

net  quick  assets  are  of  the  greatest  importance,  since  the 
trading  condition  of  the  firm  is  thereby  shown.  The  ratio 
existing  between  these  various  items  is  indicative  of  the 
degree  of  promptness  mth  which  the  customer  can  pay. 
Credit  men  have  a  rough  rule  that  there  shpuld  be  $2  of 
quick  assets  for  every  dollar  of  current  liabilities.  Also, 
the  total  of  the  liquid  assets  should  be  about:  sufficient  to 
pay  off  the  current  liabilities.  This  is  subject  to  modifica- 
tion, however,  when  some  of  the  bills  payable  -consist  of 
long-time  commercial  paper. 

Many  credit  men  consider  only  the  figure^X\r^  have  so 
far  discussed  and  neglect  almost  entirely  tl^^Jxed  assets 
and  the  slow  liabilities.  This  is  because  theselGrxed  assets 
are  not  to  be  sold,  and  because  their  value  cannot  be 
definitely  known.  Furthermore,  in  the  case  of  so  many 
bankruptcies,  it  has  been  found  that  the  real  estate, 
buildings,  plant,  and  other  items  have  to  be  seriously 
depreciated.  The  credit  man,  therefore,  feels  a  natural 
hesitancy  in  accepting  any  valuation  placed  on  these 
assets  by  the  customer.  It  is,  of  course,  important  to 
investigate  whether  a  plant  is  being  kept  up-to-date, 
whether  proper  reserve  for  depreciation  is  being  pro- 
vided, and  whether  sufficient  amounts  are  being  expended 
for  repairs  and  renewals. 

In  connection  with  the  questions  of  bonds  and  mort- 
gages, if  the  figure  is  a  large  one,  the  provisions  of  each 
mortgage  should  be  investigated,  and  if  the  time  of  pay- 
ment is  in  the  near  future,  the  customer  may  with  perfect 
propriety  be  called  upon  to  explain  his  arrangements  for 
refinancing. 

The  '' capital  stock"  and  "surplus"  measure  the  net 
worth  of  the  concern.  The  figures  representing  these 
two  items  mean  nothing  unless  the  rest  of  the  state- 
ment is  true.    If  the  assets  must  be  scaled  do^vn,  we  must 


74  Credits 

scale  down  the  net  worth  to  the  same  extent.  If  liabilities 
are  not  shown  in  the  statement  that  should  be  shown 
there,  we  must  reduce  our  net  worth  accordingly.  There- 
fore, it  is  only  after  having  closely  scrutinized  all  the 
elements  going  to  make  up  the  balance  sheet  that  we 
can  measure  the  net  worth.  It  is  advisable  to  note 
whether  the  surplus  has  been  voted  to  remain  a  part  of 
the  business,  or  subject  to  disposal  in  the  form  of  divi- 
dends. Inasmuch  as  the  surplus  measures  to  some  extent 
the  earning  capacity  of  the  company,  it  is  often  well  to 
determine  whether  this  surplus  was  actually  formed  by 
earnings,  or  whether  it  came  on  the  books  by  appreciation 
of  real  estate  or  investments,  or  whether  it  is  a  surplus 
which  was  paid  in  by  the  stockholders. 

Analysis  and  Importance  of  Sales  and  Expense 

In  retail  credit  particularly,  it  has  been  noted  that  too 
many  merchants  have  an  idea  that  profits  come  with 
increased  sales,  when,  as  a  matter  of  fact,  unless  the 
business  is  properly  organized  and  conducted,  an  increase 
in  sales  may  be  accompanied  by  an  increase  in  losses. 

Profits  come  from: 

1.  Efficient  and  economical  administration  of  a  busi- 
ness. 

2.  Concentrating  purchases  with  a  few  good  houses. 

3.  Buying  often  and  wisely. 

4.  Turning  the  stock  often,  a  fact  that  the  average 
merchant  does  not  often  realize. 

It  may  be  a  coincidence,  but  it  is  well  worth  noting, 
that  the  man  who  knows  most  about  his  business  seldom 
fails — that  the  man  who  knows  little  about  his  business 
seldom  succeeds. 

The  policy  of  concentrating  purchases,  buying  often, 
and  turning  stock  frequently  means  greater  profits  and 


Using  the  Information  75 

less  debts.  It  means  few  creditors  instead  of  many,  and 
it  means  that  a  small  stock  of  goods  is  always  worth  its 
cost,  as  contrasted  with  a  large  stock  of  shopworn  goods 
that  is  always  worth  less  than  inventory.  It  means  very 
few,  if  any,  goods  sold  at  a  loss  of  profit.  It  means  that 
every  dollar  is  working  and  earning  money  for  the 
proprietor,  and  not  that  the  dollars  invested  in  active, 
fresh  merchandise  are  carrying  the  burden  of  unsalable 
goods.  It  means  no  worry  in  depressed  times  as  against 
constant  worry  all  the  time.  It  means  that  the  good, 
strong  wholesale  houses  are  really  interested  in  the 
retailer's  business  and  success — many  small  creditors  are 
apt  to  be  a  menace  rather  than  a  help — and  it  means, 
finally,  an  opportunity  of  success  instead  of  possibility 
of  failure. 

From  the  standpoint  of  a  wholesaler  selling  to  small 
retailers,  let  us  look  at  the  importance  of  turning  stodc 
frequently.  The  importance  of  analyzing  sales  and 
expense  and  how,  in  many  instances,  it  is  of  even  more 
importance  than  the  analysis  of  assets  and  liabilities 
is  shown  in  the  following  example : 

Assume  that  two  merchants,  Anderson  and  Brown,  are  both 
in  the  same  condition  as  to  assets  and  liabilities,  each  having 
$10,000  in  assets  and  owing  $6,000.  Each  one  has  an  equity  in 
his  own  business  of  $4,000,  which  is  less  than  his  debts.  Each 
business,  therefore,  belongs,  not  to  the  proprietor,  but  to  their 
creditors;  hence,  from  a  credit  standpoint,  each  is  a  poor  credit 
risk,  the  assets  at  fair  valuation  not  being  equal  to  the  debts. 
They  both  buy  on  terms  of  three  months. 

If  the  credit  man  for  the  wholesale  house  should  decline  to 
extend  credit  to  them  both,  he  would  be  right  in  one  case  and 
wrong  in  the  other,  because  he  has  not  taken  into  consideration 
their  respective  sales  and  expenses. 


76  Credits 

Sales  and  Expenses 

Anderson  has  $10,000 

Anderson  owes 6,000 


Equity $  4,000 

Sales $18,000 

Expenses   4,800 

Profits  4,800 


Net  profits 0 

Receipts  each  month $  1,500 

Less  month 's  exi>ense 400 


Net  receipts  each  month $  1,100 

He  owes  $6,000,  so  that  it  takes  him  practically  6  months  to 
pay  his  bills.  He  makes  no  money  and  is  3  months  slow  in  pay- 
ing his  bills.    Credit  should  be  declined  him. 

Brown  has  $10,000 

Brown  owes 6,000 


Equity $  4,000 

Sales $36,000 

Expenses   7,200 

Profits  (figuring  on  about  the  same  per  cent 

of  profit  as  Anderson) 9,000 


Net  profits $  1,800 

Receipts  each  month $  3,000 

Less  month 's  expense 600 


Net  receipts  each  month $  2,400 


Using  the  Information  11 

Brown  owes  $6,000,  so  that  it  takes  him  2i/^  months  to  pay  his 
bills.  He  makes  $1,800  net  profit  each  year  and  pays  his  bills 
before  they  are  due.  He  is  a  good  credit  risk,  and  the  credit  man 
should  not  hesitate  to  grant  him  accommodations. 

From  the  two  foregoing  examples,  it  is  evident  that  no  cus- 
tomer should  be  declined  credit,  based  simply  on  a  statement  of 
assets  and  liabilities,  when  the  activity  and  expenses  of  the  busi- 
ness are  really  the  determining  factors. 

To  illustrate  statements  we  have  made  regarding  the  turnover, 
or  the  ratio  between  average  inventory  and  total  cost  of  goods 
sold,  the  following  balance  sheet  and  statement  of  facts  should 
be  analyzed. 

COWAN  CLOTHING  COMPANY 
Birmingham,  Tenn. 

Assets 

Merchandise $18,300 

Fixtures 1,700 

Good  accounts 1,500 

Total $21,500    $21,500 

Liabilities 

Indebtedness    for    Mdse.    ($3,500 

past  due)    $  4,500 

Borrowed  money,  bank 2,000 

Other  borrowed  money 3,600 

Total   $10,100      10,100 

Equity $11,400 

Sales,  1911  $25,000 

Expense    5,400 

Rent 150 

Personal  withdrawals 100 

Clerk  hire 125 


78  Credits 

Analysis  of  the  foregoing  data  siiows  that  the  yearly  sales 
of  $25,000,  which  carried  a  profit  in  the  neighborhood  of  $6,500, 
leave  cost  of  goods  sold  in  one  year  $18,500.  The  amount  of  the 
inventory  shown  on  the  balance  sheet  is  equal  to  $18,300; 
therefore,  the  stock  is  turned  over  only  once.  In  making  an 
analysis  of  this  kind,  it  must  be  constantly  borne  in  mind  that 
an  inventory  is  taken  at  the  most  convenient  time,  which  nat- 
urally means  at  the  time  when  the  stock  of  goods  is  the  lowest. 
Therefore,  in  this  example,  the  average  inventory  would  be  much 
higher  than  $18,300,  probably  $22,000  or  $23,000.  Thus,  in 
reality,  the  Cowan  Clothing  Company  does  not  turn  its  stock 
even  once. 

Now  if  this  merchant  turned  his  stock  at  least  three  times, 
which  he  should  do,  he  would  carry  a  stock  of  goods  not  over 
$6,000  (as  contrasted  with  the  $18,300),  giving  him  $12,000  to 
reduce  indebtedness.  In  other  Avords,  he  would  be  out  of  debt 
and  have  $2,000  besides.  As  it  is,  the  monthly  receipts  are 
approximately  $2,000.  Subtract  from  this  figure  the  monthly 
expense  of  $450  and  there  is  left  $1,550,  which  simply  means  that 
it  will  require  the  receipts  of  over  6  months  to  pay  the  debts. 

Obviously  this  merchant's  affairs  are  in  bad  shape  and,  unless 
he  very  quickly  corrects  his  system  of  doing  business,  he  will  fail. 

Determining  a  Customer's  Credit 

TVTien  the  credit  man  has  thus  analyzed  the  situation 
from  all  view^Doints,  lie  is  in  a  position  to  decide  definitely 
what  the  policy  of  his  company  will  be  towards  the  cus- 
tomer. It  is  in  making  this  decision,  which  involves  the 
assigning  of  terms  and  credit  limits,  that  the  credit  man 
mnst  exercise  keenest  judgment.  He  will  balance  the 
favorable  factor  with  the  unfavorable  one,  giving  each 
due  weight  and  consideration.  He  is  in  the  position  of 
a  judge  who  has  examined  the  evidence  and  is  about  to 
hand  down  a  decision.  He  must  be  able  to  get  away  from 
the  dry  details  of  the  reports  and  figures  wliich  are  in 
front  of  him  and  to  see  the  human  beings  who  are  behind 


Using  the  Information  79 

tiiem,  for  it  is  Ms  duty  to  forecast  what  these  human 
beings  are  going  to  do  in  the  future.  He  utilizes  past 
history  only  as  a  basis  for  prophecy.  He  makes  a  survey 
of  the  situation  from  economic  and  legal  standpoints. 
He  examines  the  data  for  evidence  of  contingent  liabil- 
ities which  are  not  shown  on  the  balance  sheet,  pictures 
to  himself  what  misfortunes  might  happen  to  the  com- 
pany, and  then  re-examines  his  file  to  see  how  well  the 
firm  is  protected  against  such  calamities. 

This  final  summing  up  of  the  various  elements  should 
be  handled  from  these  various  points  of  view.  This  fea- 
ture of  credit  work  is  so  important  that  we  can  profitably 
spend  a  little  time  in  discussing  it. 

Statistics  of  Failures 

After  the  credit  man  has  examined  the  credit  risk  from 
the  three  fundamental  standpoints,  namely,  character, 
ability,  and  capital,  he  should  know  just  what  importance 
to  assign  to  each  one.  It  is  obvious  that  he  will  be  greatly 
aided  in  this  by  a  survey  of  statistics  on  the  subject  of 
failures.  If  he  can  know,  for  instance,  that  during  a 
period  of  years  approximately  10  per  cent  of  the  failures 
were  due  to  fraud,  and  nearly  30  per  cent  of  the  fail- 
ures were  due  to  lack  of  capital,  he  has  a  definite  measure 
by  which  to  judge  his  information. 

In  this  chapter  we  show  a  chart  headed,  ''Causes  for 
Failures  in  1913-1914."  The  figures  from  which  this 
graphical  chart  was  made  up  were  taken  from  the  weekly 
magazine  issued  by  the  Bradstreet  Company.  Consider- 
ing all  the  failures  during  the  two  years  of  1913  and 
1914  as  100  per  cent,  it  indicates  that  various  percentages 
of  that  number  were  due  to  lack  of  capital,  incompetence, 


80 


Credits 


ao« 


yLack  of  capital 

/Incompetence 


CAUSES  FOR  FAILURES 
1913-1914 

Figures  tEtken  from 

Bradstreet's  Magazine 


EXPLANATION  OF  CHART 

The  percentages  shown  are  those  of  the  total  number 
(ailing  in  the  years  I9I3-M.  For  example.  A  little  less 
than  30/0  failed  because  of  lack  of  capit<J.  A  little  over 
2bf>  failed  because  of  incompetence.  Nearly  I6?t  failed 
because  of  Specific  Conditions. 


Specific  Conditions 


Inexperienee 


/Competition 
/Unwise  Credits 
_^,   '  Balance  due  to  Neglect.  Failure  of  Others. 

/Speculation,  and  Extravagance 


Fig.  12. — Causes  for  Failures 


Using  the  Information  81 

specific  conditions,  fraud,  inexperience,  competition, 
unwise  credits,  neglect,  failure  of  others,  speculation,  and 
extravagance. 

What  conclusions  can  we  draw  from  this  exhibit?  On 
the  character  side,  we  find  that  10  per  cent  of  the  failures 
were  due  to  fraud.  In  considering  the  capital  factor,  we 
find  that  29  per  cent  of  the  failures  were  due  to  lack  of 
capital.  When  we  consider  ability,  we  may  include 
incompetence  with  about  28  per  cent,  inexperience  with 
about  5  per  cent,  unwise  credits  with  2  per  cent,  and 
neglect,  failure  of  others,  speculation,  and  extravagance 
with  5  per  cent,  making  a  total  for  the  ability  factor  of 
approximately  40  per  cent. 

Four  men  out  of  ten  lacked  ability  where  only  one 
lacked  honesty,  and  three  lacked  capital.  This  accounts 
for  eight  of  the  ten  men.  The  other  two  failed  either 
because  of  competition  or  because  of  specific  conditions. 
A  failure  which  was  caused,  for  instance,  by  the  great 
Dayton  flood  would  be  ascribed  to  specific  conditions.  If 
we  can  remember  these  figures  approximately,  we  shall 
be  greatly  aided  in  passing  on  the  credit  risk,  since,  if 
we  know  that  four  out  of  every  ten  failures  are  caused 
by  lack  of  ability,  we  are  warned  that  this  element  must 
be  closely  looked  into  and  that  due  importance  must  be 
laid  upon  it. 

I  am  strongly  inclined  to  believe  that  the  statistics 
show  too  high  a  percentage  for  lack  of  capital.  It  is  the 
opinion  of  many  credit  men  that  the  commercial  agency 
reporters  are  entirely  too  prone  to  ascribe  failures  to 
this  cause.  K  a  failing  firm  has  a  very  small  capital,  the 
chances  are  that  it  will  be  reported  as  failing  on  account 
of  lack  of  capital,  not  because  of  some  other  reason  which 
may  lie  underneath. 


82  Credits 

Economic  Consideeations 

Tile  credit  man  must  examine  his  conclusions  from 
another  viewpjoint,  that  of  economic  conditions.  Purchas- 
ers of  merchandise  may  come  from  widely  separated 
sections  having  different  industries  and  divergent  needs. 
It  is  obvious  that  a  retail  merchant  in  a  one-crop  agricul- 
tural state  must  reckon  with  conditions  of  sale  and 
contingencies  of  collection  quite  different  from  those 
which  confront  a  dealer  depending  on  a  "pay-roll"  public 
in  a  manufacturing  state.  In  the  one  case,  money  does 
not  circulate  freely  until  after  the  crop  is  sold,  whereas, 
in  the  other  case,  the  disbursement  of  weekly  or  monthly 
wages  to  operatives  in  large  numbers  insures  a  reason- 
able, uniform  circulation  of  money  the  year  round. 
Plainly  the  two  buyers  should  not  receive  the  same  con- 
sideration at  the  hands  of  the  credit  man,  for  their 
purchases  from  the  house  will  not  tie  up  its  capital  for 
the  same  length  of  time. 

The  differences  between  a  fruit-growing  and  a  mining 
section,  or  a  lumbering  and  a  cattle-raising  region  exhibit 
a  similar  diversity.  Cities  and  towns  likewise  have  their 
individual  complexion  according  as  they  are  inland  or 
situated  on  the  coast,  or  have  as  summer  and  health 
resorts  a  fluctuating  transient  population,  or  possess  as 
railroad  centers  and  distributing  points  a  regular  volume 
of  traffic  calling  for  no  shifts  of  population  and  no 
variations  in  trade. 

The  credit  man  should  not  only  know  the  particular 
needs  of  each  buyer's  pubhc,  but  he  must  also  know 
whether  they  are  met  by  the  selection  of  goods.  A 
profusion  of  silks  for  mining  towns,  as  well  as  an  excess 
of  overalls  for  health  resorts,  could  mean  only  hopeless 
ignorance  or  contemplated  fraud. 


Using  the  Information  83 

Furthermore,  the  amount  of  the  purchase  should  com- 
port with  the  season  of  the  year.  In  some  sections  the 
cash  sales  are  light  until  the  crops  are  gathered  and 
sold,  for  which  reason  the  dealers  must  wait  a  year  for 
collections.  On  the  other  hand,  there  are  towns  and 
sections  where  little  variation  in  the  circulation  of  money 
is  caused  by  the  season  of  the  year,  since  the  buying 
public  is  composed  of  skilled  mechanics,  artisans,  and 
other  operatives,  office  and  other  employees,  etc.,  all  of 
whom  draw  regular  weekly  or  monthly  wages,  and  are 
thus  enabled  to  buy  independently  of  the  season.  A 
dealer  catering  to  the  requirements  of  such  patrons  would 
need  a  far  different  stock  from  that  of  a  retailer  in  a 
section  where  slow  collections  prevail,  and  he  would 
handle  choicer  and  more  quickly  moving  goods. 

The  recent  establishment  of  Federal  Reserve  Banks 
authorized  to  make  loans  on  farm  lands  has  an  obvious 
bearing  on  the  questions  of  credit,  for  the  farmer  is 
thereby  enabled  to  raise  money  regardless  of  the  season 
and  the  sale  of  his  products,  which  greatly  improves  the 
chances  of  the  retail  merchant  for  early  collections. 

Legal  ConsidUeations 

The  credit  man  should  also  examine  his  evidence  from 
the  legal  standpoint.  The  man  who  ratifies  sales  on  time 
for  large  distributing  houses  must  know  accurately 
wherein  the  laws  of  each  state  affect  collectibility  of 
accounts  made  by  its  citizens.  He  need  not  be  a  profes- 
sionally trained  lawyer,  but  he  should  know  the  statutes 
on  exemptions  and  collections  in  eacli  state  well  enough 
to  estimate  the  risk  on  conceding  credit  to  retail  mer- 
chants there.  No  great  degree  of  uniformity  is  found  in 
the  laws  of  the  different  states,  so  that  what  would  be 
safe  in  one  instance  by  reason  of  rigorous  statutes  would 


84  Credits 

be  foolhardy  in  another  because  of  the  liberal  exemp- 
tions behind  which  the  dishonest  dealer  could  take  refuge 
if  he  chose. 

In  addition  to  the  foregoing,  it  is  necessary  to  know 
the  essential  features  of  the  laws  bearing  on  partnerships 
and  corporations,  mortgages,  judgments,  executions, 
transfer,  hens,  and  inheritances  in  each  state  where  the 
house  has  debtors.  This  knowledge  will  not  come  from 
systematically  studying  the  laws  of  each  state  so  well 
as  from  accumulating  and  filing  all  the  facts  brought  out 
by  each  situation  as  it  presents  itself.  They  will  thus 
be  available  when  a  similar  case  from  that  state  is  to 
be  considered.  Printed  summaries  of  the  laws  of  each 
state  are  procurable  in  book  form,  and  they  are  even 
necessary;  but  the  credit  man  obtains  from  this  source 
no  such  guidance  as  is  afforded  by  his  own  records  of 
sales  and  dealings  Avith  buyers.  In  time  these  records 
become  so  varied  and  complete  that  they  cover  the  needs 
of  every  imaginable  case  furnishing  a  practical  plan  of 
procedure. 

Promptness  of  Payments 

Another  point  that  the  credit  man  must  take  into 
consideration  is  that  of  promptness.  The  capital  of  the 
house  is  tied  up  as  long  as  the  accounts  remain  unpaid, 
for  which  reason  promptness  in  paying  for  the  goods 
counts  almost  as  much  as  the  profit  from  their  sale, 
especially  in  lines  admitting  of  quick  turnovers.  It  is 
easy  to  calculate  the  average  time  for  outstanding 
indebtedness,  and  this  supplies  the  means  of  computing 
the  actual  loss  in  the  form  of  interest  on  the  money 
involved.  For  example,  $2,200  tied  up  for  30  days  rep- 
resents the  same  loss  in  interest  as  $66/)00  for  one  day, 
and  $3,600  withheld  for  90  days  shows  the  equivalent 


Using  the  Information  85 

interest  of  $324,000  for  one  day.  The  results  if  $1,700 
remains  unpaid  for  four  months  (120  days)  and  $500 
for  60  days  are  also  exhibited  along  with  the  first-named 
in  the  following  computation : 

The  Interest  on  $3,600  for  90  days  equals  that  on  $324,000  for  one  day 
The  interest  on  2,200  for  30  days  equals  that  on  66,000  for  one  day 
The  interest  on  1,700  for  120  days  equals  that  on  204,000  for  one  day 
The  Interest  on        500  for     60  days  equals  that  on       30,000  for  one  day 

Total     $8,000  Total     $624,000 

f 

The  average  time  for  the  $8,000  appears  on  dividing 
$624,000  by  this  sum.  This  equals  78  days  which  is  the 
total  of  the  four  accounts  averaged.  The  loss  in  interest 
is  shown  as  follows : 

At  6%  the  interest  on  $8,000  for  60  days  is  $80.00 
At  6%  the  interest  on  8,000  for  6  days  is  8.00 
At  6%   the  interest  on     8,000  for  12  days  is     16.00 


78  $104.00 

An  item  of  $104  would  be  insensible  in  a  thriving  busi- 
ness, but  relatively  it  is  a  considerable  one,  for  only  four 
accounts  aggregating  $8,000  would  occasion  this  loss.  If 
a  hundred  times  as  much  money  were  similarly  tied  up 
throughout  the  year,  the  interest  annually  would  be  some- 
thing like  $50,000,  a  sum  larger  than  any  house  can  afford 
to  sacrifice  through  misplaced  confidence  as  to  its 
customers'  promptness. 

Ceedit  Caeds 

When  the  credit  man  has  finally  reached  his  decision  as 
to  the  proper  policy  which  should  be  followed,  he  records 
this  decision  in  permanent  form,  presumably  on  some 
kind  of  credit  card.  The  credit  card  will  be  treated  more 
at  length  in  the  next  chapter.  On  this  card,  he  will  prob- 
ably indicate  a  credit  limit  in  excess  of  which  the  account 
is  not  to  go. 


86  Credits 

These  credit  limits  are  sometimes  dangerous  things  to 
have  outstanding.  Salesmen  may  solicit  and  obtain 
orders  based  on  old  terms  and  credit  limits,  and  unless 
the  credit  man  insists  on  personally  approving  every 
order  before  it  is  placed,  the  material  may  be  shipped 
without  his  knowledge  in  spite  of  the  fact  that  a  radical 
change  for  the  worse  in  the  customer's  affairs  may  have 
occurred.  Neither  can  it  be  said  that  the  confidence  which 
the  house  places  in  the  buyer  admits  of  rigorously 
accurate  calculation.  For  example,  a  man  may  be  prompt 
for  several  years,  and  thus  prove  himself  deserving  of 
a  line  of  credit  of  $1,000.  But,  if  a  drought  of  exceptional 
length  bums  up  the  crops  in  his  section,  his  collections 
mil  be  poor  and  his  sales  contracted  so  that  he  cannot 
meet  his  obligations  to  the  house  as  promptly  as  before. 
It  is  plain  that  business  prudence  prescribes  a  reduction 
of  the  line  of  credit  hitherto  allowed  him. 

The  same  result  may  follow  an  increase  in  competition, 
especially  if  this  proceeds  from  rivals  possessing  larger 
capital,  better  locations,  and  a  more  attractive  display  of 
goods.  A  shift  in  trade  channels  due  to  building  addi- 
tional railroads  and  starting  new  to"\\Tis  may  so  seriously 
damage  the  paying  power  of  a  retail  merchant  that  he 
must  be  classed  as  slow  or  even  as  wholly  undesirable, 
and  this  change  may  supervene  in  less  than  one  year,  or 
in  one  season.  It  then  becomes  necessary  to  restrict,  or 
cut  off  altogether,  a  credit  that  was  amply  justified  by 
prior  conditions. 

TEST  QUESTIONS 

1.  "WTiat  do  you  understand  by  "terms  of  sale"? 

2.  Why  is  the  ultimate  consumer  the  one  who  finally  deter- 
mines the  time  allowed  on  the  middleman's  purchases? 


Using  the  Information  87 

3.  Explain  the  two  credit  features  involved  in  purohase  of 
goods  for  resale  and  for  permanent  investment. 

4.  (a)  How  does  the  credit  man  judge  honesty? 
(b)   How  does  the  credit  man  judge  ability? 

5.  What  do  failure  statistics  show  about  causes  for  failures? 


CHAPTER  VI 

AN   ILLUSTRATION    OF   ACTUAL    PROCEDURE 

This  subject  of  credit  administration  will  probably  be 
clearer  to  the  reader  if  we  trace  a  typical  transaction 
through  the  various  credit  department  records.  In  this 
connection,  a  word  of  caution  is  necessary.  We  have 
carefully  avoided  a  detailed  discussion  of  actual  credit 
department  methods  and  illustrations  of  forms  used, 
because  of  the  ever-present  danger  that  they  may  be 
considered  ends  in  themselves. 

This,  of  course,  is  not  true,  since  we  must  have  certain 
machinery  to  attain  certain  results,  and  since  the  scheme 
of  procedure  depends  entirely  on  what  results  are 
required.  The  forms  and  exhibits,  therefore,  which  we 
show  in  the  succeeding  pages  should  be  studied  with 
the  idea  ever  in  mind  of  the  ends  that  they  serve,  and  the 
reader  must  not  be  misled  into  thinking  that  they  can 
be  bodily  transferred  to  his  ovm  business.  The  routine 
that  would  be  effective  in  the  credit  department  of  a 
steel  mill  would  be  utterly  inefficient  in  a  large  wholesale 
house  selling  small  retailers,  even  though  they  both  did 
a  large  volume  of  business,  because  the  former  would 
have  a  few  very  large  customers  while  the  latter  would 
have  a  great  many  small  customers.  The  bankruptcy  of 
but  one  customer  would  tie  up  an  enormous  amount  of 
the  Steel  Company's  money,  while  in  the  case  of  the 

88 


Actual  Procedure  89 

wholesaler  the  "law  of  average"  affords  protection.  In 
certain  industries,  therefore,  the  credit  department  is 
instructed  not  to  spare  expense  in  making  investigations 
■ — in  others,  the  credit  manager  would  be  open  to  serious 
criticism  if  his  cost  of  procuring  information  was  high. 

Coming  back  to  that  first  simple  credit  proposition 
illustrated  in  our  beginning  chapter,  let  us  assume  that 
the  Smith  mentioned  therein  is  the  Smith  Coal  Company, 
of  Chicago,  111.,  doing  a  large  volume  of  business  with 
retailers  in  the  northern  part  of  the  state,  and  that  John 
Brown,  who  has  formerly  been  working  in  Madison,  111., 
for  the  firm  of  Thompson  Brothers,  has  accumulated  a 
little  capital  and  intends  to  go  into  the  retail  coal  busi- 
ness on  his  own  account.  He  plans  to  locate  in  one  of  the 
suburbs  of  Chicago. 

The  Inquiey 

The  Smith  Coal  Company,  owing  to  the  volume  of  its 
business,  has  a  well-equipped,  up-to-date  credit  depart- 
ment composed  of  a  credit  manager,  an  assistant  credit 
man,  a  file  clerk,  and  a  stenographer.  On  the  morning  of 
March  10, 1915,  the  credit  man  receives,  through  the  sales 
department,  John  Brown's  letter  asking  for  prices  on 
coal.  Such  a  letter  as  this  is  known  as  an  "inquiry." 
(See  Figure  13.)  The  sales  department  should  always 
send  letters  of  this  kind  to  the  credit  department  in  order 
that  a  credit  investigation  may  be  started.  The  credit 
manager  will  then  be  prepared  to  assign  terms  promptly 
should  an  order  be  received  from  the  inquirer. 


90  Credits 


Chicaqo,  Illinois 
October  20,  1915 
Smith  Coal  Conipwny, 
Chicago,  Illinois. 

Gentlemen : 

Please  quote  me  your  lowest  prices  on  high-grade  domestic 
coal  for  prompt  delivery, 

I  am  planning  to  open  a  retail  yard  some  time  this  month.  I 
shall  be  able  to  handle  one  car  at  once,  as  I  have  a  few  orders  on 
hand.  I  shall  also  stock  some  coal  for  the  fall  trade  a  little  later, 
and  would  like  to  have  your  April  and  May  prices  for  this 
purpose. 

I  shall  expect  your  regular  terms  of  30  days  on  the  first  car, 
and  wish  to  know  whether  you  give  special  dating  on  coal  for 
stocking  purposes? 

Since  I  am  just  starting  in  this  business  and  am  not  known 
to  your  credit  man,  I  submit  the  following  references : 
American  Exchange  Bank,  Chicago 
City  National  Bank,  Chicago 
Thompson  Brothers,  Madison,  Illinois 
Awaiting  your  early  reply,  I  am 

Yours  truly, 

John  Brown 
JB/sg 

Fig.  13. — A  Customer's  Inquiry 


Actiuil  Procedure  91 

This  inquiry  from  John  Brown,  together  with  numer- 
ous other  inquiries  and  orders,  is  laid  on  the  credit  man 's 
desk.  The  credit  man  rapidly  sorts  the  orders  and 
inquiries  into  two  piles.  The  first  pile  contains  all  papers 
which  he  is  mlling  to  approve  at  once.  Most  of  them 
will  be  from  regular  customers  of  the  Smith  Coal  Com- 
pany, with  whose  standing  the  credit  man  is  familiar. 
These  he  approves  and  returns  to  the  sales  department 
promptly,  so  that  the  orders  may  be  entered  and  the  let- 
ters of  inquiry  answered  without  delay. 

The  other  pile  of  papers  which  come  from  people  with 
whom  he  is  not  familiar,  he  passes  to  the  file  clerk, 
requesting  him  to  get  the  credit  files.  Along  with  them 
goes  the  letter  from  John  Brown.  In  a  short  time,  the 
file  clerk  returns  all  the  papers,  together  with  a  number 
of  credit  files  which  contain  classified  information  bearing 
on  the  credit  responsibility  of  the  various  customers. 
The  credit  man  examines  these  credit  files,  looks  up  his 
other  sources  of  information,  consults  past  records,  and 
either  approves  or  disapproves  most  of  the  orders  and 
inquiries  which  he  has  left.  These  approved  papers  are 
also  sent  back  to  the  sales  department.  There  is  then  left 
only  those  inquiries  and  orders  for  which  there  are  no 
credit  files.  John  Brown's  letter  is  one  of  them.  We 
shall  now  follow  the  course  of  this  letter,  it  being  under- 
stood that  all  of  the  other  papers  are  following  a 
somewhat  similar  course. 

The  Inquiry  Caed 

First  the  credit  man  makes  out  what  is  known  as  an 
''inquiry  card"  (see  Figure  14),  which  is  printed  on 
yellow  paper.  At  this  time  he  merely  puts  in  the  name, 
address,  material,  and  date,  and  crosses  out  the  word 
"order,"  showing  that  this  card  represents  an  inquiry. 


92  Credits 

He  then  takes  the  inquiry  card  to  the  commercial  agency 
rating  books.  You  will  note  that  a  space  is  provided  on 
the  left-hand  side  under  ''ratings"  for  the  insertion  of 
the  figures  as  given  by  the  rating  books.  In  this  case, 
we  have  seen  that  Brown  is  just  starting  in  business 
and,  therefore,  is  not  rated;  so  we  write  the  word  ''none" 
after  the  letters  "B"  and  "D."  However,  supposing 
that  Bradstreet  had  offered  a  rating  of  $5,000  to  $10,000, 


Date   ^'0//S'  N 


^^— »  (Stenographer.  Write  these  reference*) 


Fig.  14. — Inquiry  Card  (Yellow) 

first-grade  credit,  we  should  have  to  put  the  number  5 
immediately  after  the  letter  "B"  and  the  number  10  in 
the  next  open  space  following  the  oblique  line,  and  the 
number  1  after  the  dash.  As  we  have  seen,  however,  this 
customer  was  not  rated  and  the  credit  man,  therefore, 
takes  the  card  back  to  his  desk  to  decide  what  action 
should  be  taken. 

He  decides  that  in  view  of  the  circumstances,  it  will  be 
satisfactory  to  write  the  customer  direct  for  information. 


Actual  Procedure  93 

SMITH  COAL  COMPANY 

Chicago,  Illinois 
Mr.  John  Brown,  October  21,  1915 

Chicago,  lUinois. 
Dear  Sir : 

Your  letter  of  inquiry  dated  March  9  has  been  referred  to  me 
by  our  sales  manager  for  credit  approval.  We  have  instituted 
our  regular  credit  investigation,  and  have  written  the  references 
that  you  were  good  enough  to  give  us. 

"We  note  that  you  have  orders  on  hand  for  domestic  fuel  and 
assume,  therefore,  that  you  will  want  rush  shipment.  This  being 
the  case,  you  will  probably  desire  to  send  us  your  check  in 
advance  or  to  let  us  have  the  guarantee  of  some  responsible  indi- 
vidual or  institution  covering  the  first  order. 

If  you  desire  credit  accommodation  on  this  one  car,  it  will 
greatly  hasten  our  investigation  if  you  will  favor  us  with  a 
statement  showing  your  financial  condition  in  detail.  Neither 
of  the  commercial  agencies  gives  you  a  rating,  which  means  that 
they  carry  no  report  on  file.  It  will  probably  take  them  some 
little  time  to  issue  a  report,  and  this  delay  can  be  eliminated  if 
we  can  obtain  credit  information  direct  from  you. 

For  many  years  we  have  been  accustomed  to  request  financial 
statements  direct  from  our  customers,  since  we  believe  that  the 
more  we  know  of  their  affairs  the  better  we  are  equipped  to 
serve  them.  We,  ourselves,  give  complete  figures  to  Dun  and 
Bradstreet  twice  each  year. 

For  your  possible  convenience  we  inclose  one  of  our  regular 
blank  statement  forms,  which  may  be  filled  in  and  returned  to 
us. 

Regarding  special  dating  on  summer  coal,  the  best  terms  that 
we  can  possibly  grant  are  30  days  net  from  date  of  shipment. 
However,  it  is  not  unusual  for  our  collection  department  to 
accept  notes,  bearing  interest  at  6  per  cent,  in  such  cases.  This 
feature  can  be  arranged  later. 

May  we  not  expect  your  early  reply? 
Yours  truly, 
WJ/sg  William  Jones 

Stamp  inclosed.  Credit  Manager 

FiQ.  15. — Letter  Eequeoting  Property  Statement 


94  Credits 

He  dictates  to  the  stenographer  a  letter  such  as  we  have 
shown  in  Figure  15.  When  it  is  written,  it  is  handed  to 
the  credit  man  for  signature.  He  signs  it,  and  attaches 
to  it  a  blank  statement  form,  which  is  to  be  filled  in  by 
Mr.  Brown.  He  instructs  the  stenographer  to  inclose  a 
stamped  return  envelope  and  to  mail  the  letter. 

He  must  then  decide  what  kind  of  investigation  to 
make.  For  the  present,  it  will  be  sufficient  for  him  to 
obtain  agency  reports  from  both  Dun  and  Bradstreet, 
and  to  write  letters  of  inquiry  to  the  three  references 
which  Brown  named  in  the  statement.  He  puts  check 
marks  in  front  of  the  letters  ''B"  and  ''D,"  signifying 
that  a  Bradstreet  report  and  a  Dun  report  are  both 
wanted.  On  the  lower  portion  of  the  card,  he  writes  in  the 
name  of  the  two  banks  and  the  other  reference.  He  then 
takes  Mr.  Brown's  inquiry  and  stamps  it  with  his  credit 
stamp  quoting  "terms  are  to  be  assigned  later  after  in- 
vestigation." The  inquiry  is  then  returned  to  the  sales 
department.  The  words  "to  be  assigned"  are  written 
after  "terms"  on  the  inquiry  card,  and  the  card  is  then 
turned  over  to  the  file  clerk. 

The  Credit  File 

This  card,  an  order  on  the  file  clerk  and  the  stenog- 
rapher to  do  certain  things,  instructs  the  file  clerk  by  its 
color  (yellow)  to  make  up  a  new  credit  file.  The  check 
marks  under  the  word  '  *  ratings ' '  show  him  what  agency 
reports  are  wanted.  The  file  clerk  takes  this  inquiry 
card,  and  from  the  information  contained  on  it  makes  up 
a  revision  card.  (See  Figure  16.)  On  the  left-hand 
side  under  the  word  "asked"  and  opposite  the  letters 
"B"  and  "D,"  he  inserts  the  date.  From  his  records, 
he  determines  what  the  next  available  file  number  is. 


Actttal  Procedure 


95 


He  finds  they  have  at  that  time  a  total  of  3,504  credit 
files.  He  makes  out  a  new  credit  file- jacket,  which  simply 
consists  of  one  piece  of  heavy  paper  about  19x1134  inches 
folded  in  the  middle  forming  a  pocket  into  which  may  be 
put  reports,  letters,  etc.  He  stamps  the  new  file  number 
on  it,  namely,  3505,  and  puts  this  empty  file-jacket  in  one 
of  his  desk  drawers  reserved  for  the  purpose.    He  writes 


Jaft.U  Fet.\ 

c 

/Max-V/ 

AprUMayX/jun.  U 

Jsl.  \/ AugA. 

/  Sep-U   Oct  U   Nov.  U  Dec. 

A«l^ss 

Aeked 
B  ^/ <?///" 

B 

(„.-^t^t.-ti-<S«-^  o    , 

,_^:^^^i'-»-t-<«-<-o 

Reed 

Remarks 

Asked 
B 

D 

Rec  d                     Remarkt 

R 
D 

D 

B 

B 
D 

D 

Fig.  16. — Eevision  Card 


the  new  number  on  the  inquiry  card  and  on  the  revision 
card.  He  then  writes  out  two  commercial  agency  tickets ; 
one  for  Bradstreets,  and  one  for  Dun.  These  tickets  are 
simply  printed  requests  for  late  reports.  They  are  either 
mailed  or  delivered  to  the  agencies  at  the  close  of  the 
day.  He  then  files  the  revision  card  alphabetically  in  a 
cabinet  which  is  marked  "active"  and  passes  the  inquiry 
card  on  to  the  stenographer. 


96 


Credits 
The  Index  Cakd 


The  inquiry  card,  on  account  of  its  color  and  the 
instructions  written  on  its  face,  acts  as  a  request  to  the 
stenographer  to  make  out  an  index  card,  which  is  merely 
a  blank  card  3x5  inches  showing  merely  ''John  Brown, 


Name 

/^^^o-ex^-^^^*  y 

^^^x-t-i ^ 

FneNo.    -^^^^ 

Address 

C-A-K-^r-t!'-^.:? 

.   9^£^-..o-^^ 

Y>             1st           2nd          3rd 

4th            Terms            Date            Limit 

Remarks 

1            B'   -'*v->^^  i              1 

fif/f 

^A_t-tfcJ>^  -.^J-^c 

S         ^ 

V 

'•H^ 

^  ^ 

.,.v.,.-»-i<.t-i-«-7?" 

/:5L^  -<2.*<=6, 

•^S       B 
^        D 

i 

e^L^-^iaiv^ 

0^       D 

i 

<a»       B 

% 

^       D 

1 

Fig.  17.— Credit  Card 

This    card    is    permanently    filed    geographically.      By    referring,   to    the 

proper   state  and   city   it  can   be   found   arranged  alphabetically 

with   others   belonging   to    the  same   city. 

Chicago,  111.,  No.  3505,"  and  a  credit  card.  (See  Figure 
17.)  She  fills  in  on  the  credit  card,  the  name  and  address 
of  the  customer,  file  number,  and  agency  ratings.  She 
then  writes  a  standard  letter  of  inquiry  to  each  of  the 
three  references  which  reads  as  follows ; 

March  10, 1915 
American  Exchange  Bank, 

Chicago,  III. 
Gentlemen : 

In  connection  with  our  present  credit  file  revision,  we  shall 
be  glad  to  know  your  opinion  of  the  character,  habits,  and 


Actual  Procedure  97 

business  ability  of  Mr.  John  Brown,  Chicago,  111.,  formerly  of 
Madison,  111. 

This  inquiry  is  in  the  regular  course  of  business,  and  should 
not  be  interpreted  as  reflecting  in  any  way  on  Mr.  Brown. 

We  shall  be  delighted  to  serve  you  in  turn  when  the  occasion 
arises. 

Yours  very  truly, 

Smith  Coal  Company 

With  each  of  these  letters  she  incloses  a  stamped  return 
envelope.  She  then  returns  the  original  inquiry  card 
and  the  two  cards  she  has  just  made  out,  namely,  the 
index  card  and  the  credit  card,  to  the  file  clerk.  The  file 
clerk  puts  the  credit  card  in  file  No.  3505  which,  you  will 
remember,  he  has  laid  aside  in  his  desk  drawer.  He 
files  the  index  card  in  the  index  card  cabinet.  This 
cabinet  contains  one  card  for  every  credit  file.  The 
cards  are  filed  alphabetically,  this  one  being  placed  under 
the  *'B's. "  If  we  ever  have  occasion  to  want  Mr. 
Brown's  file,  we  look  in  this  index  card  cabinet  for  the 
card  bearing  his  name  and  his  file  number. 

All  files  are  permanently  kept  in  numerical  order,  start- 
ing with  No.  1  and  ending  with  the  highest  number.  These 
index  cards  after  once  being  put  in  the  cabinet  are  never 
supposed  to  be  removed,  since  if  they  should  be  lost  con- 
siderable embarrassment  might  result  when  a  file  was 
desired.  The  inquiry  card  itself  is  inserted  in  the  empty 
file-jacket  No.  3505. 

Handling  Infokmation 

We  now  have  to  wait  until  the  information  starts  to 
come  in.  Probably  we  shall  hear  first  from  the  three 
references.  Their  letters  will  contain  more  or  less  im- 
portant information  regarding  Mr.  Brown.  They  will 
be  acknowledged  and  put  into  file  No.  3505.    We  shall 


98 


Credits 


To  SiTBtK  Coal  Company,  Chicago.  nTinois;  For  iFie  purpose  of  obtaining  creJit  for  goods  or  for  any  extension 
granted  on  account,  the  following  is  given  you  as  a  true  statement  of  assets  and  liabilities  and  general  financial 
condition  as  of    ^^H.-^^l^^     /  I9I.£~" 


ASSETS 


LIABIUTIES 


Ca^  onHand  and  In  Bank 

Notes  Receivable 

Accounts  Receivable 

Merchandise 

Real  Estate 

Plant 

OtherAssels  (in  detail) 


_AA--o-y^-*'«^ 


I  o-^^CXju^ 


Accounts  Payable 

Notes  Payable  (mdse.) 
(bank) 
(others' 

Mortgages  (chattel) 
•>       (real  estate) 

Other  Liabilities 


Net  Worth 


^y^ 


S    SS2J'i^ 


^ptl 


TOTAL 


s  yyf^- 


What  kind  of  business  do  you  condi 
Insurance  on  merchandise? 
Sales  last  year  >    _^_ 


^(^    (^Oiy>..^^ 


C^t-o-f 


^ 


<x-^>-z/ 


On  buildings  and  plant  >. 
Expenses  last  year?. 


Whar  amount  of  your  indebtedness  is  secured  and  ^>^w>  *^^^*''-*'"'*^-"^--^''*-^  ^ 


;^ 


JL^aJ-^i. 


Have  you  any  contingent  liabilities  not  mentioned  in  above  statement  and  if  so  what  are  they.. 


Have  you  any  judgments,  judgment  notes,  or  other  liens  against  you>. 
Have  you  any  suits  pending  .>_ 
With  whom  do  you  bank? 


C^<=^ 


K^-€x.^>^t^,   (3iL,..^c_^au^  t 


What  portion  of  your  real  estate  is  homestead  >       (^   '^ 2 ^ 

References         CX-^-^      <^  e^-^=<-~^  t-      /g^*^«->-<  ,        Q^Stj^   nc^cJl!/  Ija^^    (2^L-<L^l^j 


A2->-r>-o-    ^'> 


7'Ae  foregoing  slolenKnt.  both  printed  and  wrilUn.  has  been  carefully  read  and  considered  by  the  undersigned,  who  declares  it 
to  be  a  full  and  correct  rendering  0/  his  firm's  finanddt condition  as  of  the  dale  shown.      The  ansuer  to  all  questions  not 
answered  hereon  in  writing  is  "No." 


^  ^^Vt>-«-«/-»'i-o 


FIRM'S  SIGNATURE    ^^^^W-c</-^a-^    L^a-ex/' ^i 

By  V,V  ''"^^'"'>-'    ^  *"  ' 


'ec-rs'^ 


A  member  of  the  firm. 


Fig.  18.— Statement  Blank  Filled  In 


Actual  Procedure 


99 


receive  a  letter  from  Mr.  Brown  inclosing  the  statement 
blank  properly  filled  in.  (See  Figure  18.)  This  will  be 
acknowledged  by  a  short  note  of  thanks,  and  the  letter 
and  statement  will  be  inserted  into  file  No.  3505.  Then 
the  commercial  agency  reports  will  probably  come  in. 
As  each  is  received,  it  should  be  checked  on  the  revision 
card  which,  as  you  will  remember,  we  filed  in  a  cabinet 

r  May  \ 


Name 


Address 


Asked 


Reed 


Remarks 


R«d 


Remarks 


Fig.  19. — Eevision  Card 

After  reports  have  been  received,  checked  on  card,  and  all  tabs  removed 
except  the  one  indicating  the  next  revision  date. 


marked  '' active."  Assume,  for  instance,  that  the  Dun 
report  came  in  on  March  17,  and  the  Bradstreet  report 
on  March  19.  The  date  each  one  was  received  will  be 
entered  under  the  heading  *' received"  opposite  the  let- 
ters "B"  and  ''D"  respectively. 

Then  all  the  tabs  at  the  top  of  the  card  must  be 
clipped   off,  except  one.     This  one  will  show  in  what 


100  Credits 

month  the  file  should  be  revised.  Revision  should  nor- 
mally come  once  a  year.  We  decide  to  revise  this 
particular  file  in  May  of  next  year,  hence  we  clip  off  all 
the  tabs  except  the  one  for  May.  The  card  is  then  ' '  satis- 
fied," and  we  may  file  it  permanently  in  a  cabinet  marked 
'  *  inactive. ' '  The  * '  active ' '  cabinet  contains  nothing  but 
cards  which  show  figures  entered  under  the  asked  column 
without  corresponding  entries  under  the  received  column. 

The  file  clerk  then  puts  the  two  agency  reports  in  file- 
jacket  No.  3505  and  from  the  inquiry  card  which  is 
contained  therein,  he  sees  that  no  more  information  is  to 
be  expected.  The  file  is,  therefore,  ready  to  be  written 
up.  He  then  takes  the  inquiry  card  out  of  the  file  and 
puts  it  into  the  inquiry  card  cabinet  where  it  is  filed  along 
with  many  others  like  it  in  alphabetical  order.  These 
inquiry  cards  are  saved  as  a  matter  of  record,  although 
most  of  them  can  be  destroyed  when  they  get  a  year  or 
so  old.  The  file  containing  the  credit  card,  the  two  bank 
letters,  the  letter  from  Thompson  Brothers,  the  two 
agency  reports,  and  the  letter  and  statement  from  Mr. 
Brown  is  passed  to  the  assistant  credit  man  for  "write 
up." 

The  first  thing  which  the  assistant  does  is  to  reclassify 
the  financial  statement  on  a  standard  statement  blank. 
(See  Figure  20.)  He  then  dictates  (possibly  to  a  com- 
mercial phonograph)  a  summary  of  the  information  so 
far  developed.  First,  he  consolidates  all  the  information 
bearing  on  Brown's  character;  second,  that  bearing  on  his 
ability;  and  third,  that  bearing  on  his  capital.  In  this 
summary,  he  includes  information  which  was  received 
through  the  commercial  agencies,  references,  and  the 
customer  liimself.  This  summary,  which  he  writes  up, 
is  meaty  and  full  of  facts,  and,  since  it  contains  only  the 
most   important  data,  can   be  made  very   short.     The 


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Actual  Procedure  101 

file  and  the  phonograph  cylinder  then  g-o  to  the  stenog- 
rapher, who  writes  up  on  the  summary  sheet  the  matter 
which  the  assistant  credit  man  has  dictated.  The  sum- 
mary sheet  is  a  form  like  Figure  20,  except  that  the  face 
has  four  columns,  allowing  four  financial  statements  of 
different  dates  to  be  shown.  The  reverse  side  is  blank, 
affording  space  for  the  dictated  material  to  be  written. 
When  the  statement  figures  have  been  typewritten  and 
the  "summary"  dictation  recorded,  the  file  is  returned 
to  the  assistant  credit  man,  who  checks  the  figures  in 
order  to  be  sure  that  there  has  been  no  error  made  in 
transcription.  He  then  passes  the  file  to  the  credit  man 
for  approval  of  terms. 

You  should  note  that  this  routine  of  classification  and 
transcription  is  very  seldom  necessary,  except  under 
certain  circumstances  where  the  customer's  financial 
standing  is  poor,  his  purchases  large,  and  the  volume  of 
credit  information  very  great.  Under  these  conditions, 
and  only  these,  is  it  advisable  to  spend  much  time  or 
money  in  reclassifying  credit  information  such  as  has 
been  described.  Wlien  these  conditions  do  exist,  it  is  real 
economy  to  "boil  down"  the  data,  so  that  a  large  mass 
of  letters,  reports,  and  other  papers  will  not  have  to  be 
examined  every  time  the  credit  man  has  occasion  to 
consult  the  file. 

Assigning  Terms 

The  credit  man  studies  the  risk  from  all  points  of 
view  along  the  lines  discussed  in  our  last  chapter.  He 
may  feel  the  need  of  additional  information,  in  which 
case  he  lays  the  file  aside  until  he  can  obtain  it.  He 
carefully  analyzes  the  financial  statement.  When  he 
has  finally  made  his  sound  and  well  considered  judgment, 
he  records  the  result  of  that  judgment  on  the  credit  card 


102  Credits 

which,  you  will  remember,  has  been  accompanying  the 
file.  You  will  note  in  Figure  17  how  he  records  the 
information.  He  has  assigned  terms  of  ''30  days"  and 
a  credit  hmit  of  $300.  The  credit  file  is  then  given  to 
the  file  clerk,  who  puts  it  in  its  proper  numerical  position 
in  the  credit  file  cabinet.  The  credit  card  is  filed  in  the 
credit  card  cabinet,  which  is  arranged  alphabetically 
according  to  states  and  cities. 

Now  when  the  order  comes  in,  the  credit  man  simply 
by  glancing  at  the  credit  card  can  tell  what  terms  to 
approve.  If  the  order  should  be  a  large  one  amounting 
to  more  than  the  $300  limit  which  he  has  assigned,  he 
may  have  need  to  consult  the  credit  file  again,  otherwise 
not. 

In  this  connection,  the  reader  should  note  that  in  many 
lines  of  business,  terms  of  sale  have  been  standardized 
and  are  the  same  to  all  customers  who  are  entitled  to 
credit.  In  others,  terms  vary  with  the  customer,  his 
location,  the  character  of  his  business,  his  financial  stand- 
ing, the  character  of  his  own  customers,  and  the  season  of 
the  year.  A  wholesaler  selling  a  definite  trade  cannot 
afford  to  discriminate  between  his  customers,  while  a 
manufacturer  dealing  with  many  Avidely  varying  kinds 
of  business,  in  widely  separated  parts  of  the  United 
States  and  in  foreign  countries  and  confronted  by  differ- 
ing trade  customs  and  seasons,  may  rightly  have  different 
terms  although,  even  in  this  extreme  case,  he  must  be 
careful  not  to  deal  unfairly  with  his  trade. 

Keeping  Information  Al,ive 

Next  year  on  the  first  of  May,  the  credit  man  will  care- 
fully look  through  that  * '  inactive ' '  section  of  the  revision 
cards.  He  will  take  from  the  file  all  those  cards  which 
bear  a  tab  marked  May.    Then  he  and  the  sales  manager 


Actual  Procedure  103 

will  confer  as  to  tlie  probable  chances  of  doing  business 
with  each  of  the  customers  whose  names  are  shown  by 
these  cards.  They  will  decide  that  from  some  of  them 
no  business  can  be  expected.  These  cards  are  refiled  in 
the  ''inactive"  section.  The  balance  of  the  cards  rep- 
resent customers  whose  credit  files  should  be  kept  up  to 
date.  The  file  clerk  will  be  given  these  cards,  and  will 
be  instructed  to  ask  for  new  agency  reports.  At  the 
same  time,  the  stenographer  may  be  requested  to  write 
letters  of  inquiry  to  banks  in  connection  with  some  of 
the  names.  It  may  be  decided  to  obtain  information 
through  any  of  a  number  of  sources.  The  credit  files 
for  these  names  are  set  aside,  and  the  dates  that  the 
agency  reports  were  requested  are  posted  to  the  same 
revision  cards  that  we  discussed  before.  John  Brown's 
card  will  have  the  dates  posted  on  the  two  lines  below  the 
dates  already  shown.  The  cards  themselves  are  filed  in 
the  "active"  revision  card  cabinet  and  the  procedure  is 
in  every  respect  the  same  from  this  point  on. 

When  we  come  to  put  the  terms  on  our  credit  card,  we 
do  it  in  the  space  marked  1916.  We  shall  also  insert 
agency  ratings  on  this  credit  card.  The  four  columns 
headed  *'lst,"  "2nd,"  "3rd,"  and  "4th,"  show  from 
which  of  the  four  yearly  rating  books  the  rating  was 
taken.  If  the  rating  is  taken  from  the  book  which  is  sent 
out  to  subscribers  at  the  begininng  of  the  second  quarter 
of  the  year,  the  rating  will  be  written  in  the  second  col- 
umn, etc.  It  can  readily  be  seen  what  a  valuable  record 
this  credit  card  becomes  after  a  few  years.  It  shows  a 
continuous  history  of  the  business  dealings  with  the  cus- 
tomer. When  one  credit  card  is  entirely  used  up  a  new 
one  can  be  made  out  and  the  first  filed  permanently  in 
the  credit  file- jacket. 


104  Credits 

Functions  of  the  Inquiry  Caed 

We  can  go  back  for  a  moment  and  discuss  another 
phase  of  our  subject  which  we  neglected  in  the  early  part 
of  this  chapter.  The  inquiry  card  has  two  functions. 
One  function  is  that  of  serving  as  an  order  to  the  file 
clerk  to  make  out  a  new  credit  file  and  to  issue  certain 
agency  tickets,  and  as  an  order  to  the  stenographer  to 
write  certain  letters.  The  other  function  is  that  of  a 
record  of  the  inquiry.  In  order  to  separate  properly 
these  various  functions,  we  may  have  the  same  form 
printed  on  two  different  cards,  one  card  to  be  tinted 
yellow  and  the  other  card  to  be  left  white.  If  an  inquiry 
or  an  order  is  recorded  on  a  yellow  card,  the  file  clerk 
is  thereby  instructed  to  make  up  a  new  credit  file.  If 
the  order  or  inquiry  is  recorded  on  a  white  card,  no  new 
credit  file  is  to  be  made  up.  Agency  reports  and  banks 
may  be  checked  on  these  white  cards.  The  file  clerk  and 
the  stenographer  should  then  follow  the  same  procedure 
as  in  the  case  of  a  yellow  card,  except  that  no  new  credit 
file,  index  card,  credit  card,  or  revision  card  will  be  made 
up.  One  of  these  white  cards  should  be  made  out  for 
every  inquiry  that  is  received,  serving  merely  as  a  record 
of  the  terms  actually  quoted.  If  an  order  then  results, 
a  glance  at  the  inquiry  card  will  keep  the  credit  man 
from  quoting  different  terms  on  the  inquiry. 

SUMMAEY  OF  CrEDIT-GrANTING  PROCEDURE  ^ 

This  brief  sketch  of  a  credit  department  system,  if 
properly  analyzed,  shows  what  results  ought  to  be  ex- 
pected from  any  adequate  credit  system.  There  is  a 
separate  and  distinct  credit  file  for  each  customer,  con- 
taining in  an  orderly  fashion  all  the  information  bearing 
on  that  customer's  responsibility.    There  is  a  credit  card 


Actual  Procedure  105 

for  each  customer,  filed  alphabetically  according  to 
geographical  divisions,  which  shows,  for  ready  reference, 
the  terms  of  sale  and  the  credit  limit.  The  active  section 
of  the  revision  card  cabinet  shows  all  the  outstanding 
unanswered  agency  tickets,  and  it  also  shows  all  the  files 
either  undergoing  revision  or  being  made  up  for  the  first 
time.  The  files  themselves  are  kept  in  numerical  order, 
and  are  located  by  means  of  an  alphabetically  classified 
index. 

In  this  chapter,  we  have  only  indicated  the  procedure 
in  the  case  of  a  simple  transaction.  The  many  sources  of 
information  previously  discussed  have  not  been  con- 
sidered. The  important  thing  to  note  is  that  the  credit 
department  handles  information  from  practically  all 
these  sources  in  exactly  the  same  way.  It  is  seldom  that 
it  has  to  make  an  investigation  in  more  than  a  few  quar- 
ters. Usually  the  agency  report  is  sufficient  to  tell  him 
whether  the  customer  is  good  for  what  he  wishes  to  buy. 
If  not,  a  few  minutes'  conversation  with  the  salesman, 
or  a  letter  or  two  from  banks,  or  references  make  the 
decision  a  comparatively  easy  one.  Rarely  where  goodly 
amounts  of  money  are  involved  and  the  credit  risk  is 
dubious  must  we  investigate  exhaustively.  It  is  perfectly 
obvious  that  a  great  degree  of  difference  must  exist  in 
the  thoroughness  of  an  investigation  of  a  railroad  in 
buying  a  million  dollars'  worth  of  rails  and  of  a  private 
individual  in  buying  a  fifty-cent  necktie.  Our  aim  is  to 
show  the  principles  involved  in  classifying  and  recording 
information,  and  not  to  discuss  conditions  obtaining  in 
special  lines  of  business. 


106  Credits 

TEST  QUESTIONS 

1.  How  should  terms  of  sale  be  recorded  ? 

2.  How  may  a  new  credit  investigation  be  made  automatically 
at  the  right  time  1 

3.  "Why  should  terms  of  sale  be  standardized  in  the  ordinary 
wholesale  house? 

4.  What  are  the  essential  features  of  any  credit  department, 
regardless  of  size,  location,  or  kind  of  customers  ? 


CHAPTER  VII 

CONCLUSIONS 

In  the  six  previous  chapters,  we  have  discussed  with 
some  detail  the  theory  and  practice  of  credit,  with  special 
emphasis  upon  mercantile  credit.  We  are  in  a  position  to 
treat  the  subject  in  such  a  way  as  to  round  it  out  fully. 
We  have  seen  that,  in  a  general  way,  credit  is  a  temporary 
substitute  for  money  involving  the  element  of  trust, 
that  before  extending  credit  a  grantor  wishes  to  be  satis- 
fied regarding  the  character  and  ability  of  the  applicant, 
and,  finally,  that  the  element  of  capital  is  of  importance 
as  insurance  against  the  unexpected.  The  business  of 
the  credit  man  is  to  study  these  various  factors,  and  to 
approve  or  refuse  credit  to  his  company's  customer. 

In  order  to  do  this  effectively,  he  must  be  a  combina- 
tion of  lawyer,  economist,  banker,  and  diplomat.  He 
must  know  something  of  psychology,  accounting,  sales- 
manship, and  auditing.  In  order  that  he  may  know 
the  general  trend  of  business  and  financial  conditions, 
he  must  closely  watch  the  various  trade  barometers,  such 
as  crop  reports,  bank  clearings,  commercial  paper  rates, 
commodity  prices,  new  building  records,  railroad  earn- 
ings, and  stock  and  bond  prices,  inasmuch  as  experience 
shows  that  commercial  prosperity  and  depression  is  a 
matter  of  cycles.  These  cycles  may  cover  a  period  of 
years,  but  the  elements  composing  them  are  always 
the  same.  During  prosperous  times,  credit  becomes 
expanded,  men   grow   careless,   stocks   of  merchandise 

107 


108  Credits 

increase  above  prudent  amounts,  men  engage  in  outside 
enterprises,  business  is  so  good  that  additions  to  fac- 
tories and  stores  are  made — expansion  is  in  the  air. 
Everyone  is  overextended.  Then  a  reaction  sets  in,  con- 
fidence gives  way  to  distrust.  Everyone  owes,  and  is 
owed  by,  someone  else.  Repayment  of  debts  is  demanded, 
but  there  is  no  money ;  the  banks  won 't  lend,  rather  they 
are  calling  the  loans  previously  made. 

Panic  results. 

Then  a  long  period  of  lifeless  inactivity  until  thorough 
liquidation  has  taken  place,  after  which  comes  a  gradual 
improvement  until  actual  prosperity  is  again  attained. 
This  is  the  invariable  cycle  which  has  been  repeated  over 
and  over  again  in  this  counti*y.  As  no  one  who  does  not 
owe  can  become  a  bankrupt,  credit  is  the  cause  of  bank- 
ruptcy, and  also  the  cause  of  extravagance  and  specu- 
lation. 

A  careful  study  of  these  conditions  will  enable  the 
credit  man  to  draw  conclusions  which  will  determine 
his  broad  credit  policies.  He  will  spend  much  time  in 
analyzing  and  studying  his  customers,  by  groups  (1) 
according  to  the  products  which  they  use,  (2)  according 
to  the  territory  in  which  they  are  situated,  and  (3) 
according  to  the  lines  of  business  in  which  they  are  en- 
gaged. He  will  keep  records  of  past-due  accounts,  and 
from  these  records  he  will  seek  to  determine  the  causes 
which  make  for  slowness.  He  will  be  in  a  perpetual  state 
of  inquiry,  always  endeavoring  to  find  out  the  "why" 
and  *'how"  of  things,  tracing  causes  and  effects  in  the 
great  world  of  trade. 

The  desci"iption  of  the  credit  man 's  duties  and  qualifica- 
tions could  not  include  more  than  the  important  essen- 
tials— the  essentials  that  stand  as  the  fixed  quality  in  the 
problem  of  his  professional  make-up.    The  facts  of  per- 


Conclusions  109 

sonality  are  too  numerous  for  their  interplay  to  be 
reckoned,  too  varied  for  their  effects  to  be  gauged,  but 
it  is  certain  that  the  credit  man  accomplishes  more  by 
means  of  tact  than  through  the  use  of  bluntness.  In  fact, 
he  employs  courtesy  even  in  situations  exciting  ire.  Pol- 
ished, deferential,  and  firm,  he  maintains  an  even  poise 
in  all  the  trying  interviews  where  he  must  say  ''no"  to 
buyers  while  couching  his  refusal  in  terms  that  do  not 
offend.  It  is  a  proof  of  remarkable  tact  if  a  credit  man 
can  withhold  goods  from  one  whom  he  maintains  as  a 
friend. 

With  tactfulness,  courtesy,  and  good  breeding,  is 
associated  another  quality:  the  capacity  to  feel  human 
sympathy.  It  is  the  basis  of  all  confidence,  the  founda- 
tion of  all  esteem,  and  its  finest  expression  is  conveyed  by 
genial  interest  in  the  affairs  of  one 's  fellow-men ;  hence, 
the  credit  man  is  often  made  the  confidant  and  adviser  of 
those  purchasing  on  time  from  the  house,  and  to  his 
regular  duties  is  added  that  of  reviving  enthusiasm  and 
inspiring  confidence.  This  he  does  sympathetically  and 
consistently,  leaving  on  the  minds  of  his  customers  the 
impression  that  they  must  justify  his  solicitude  and  show 
themselves  worthy  of  his  esteem. 

Standards  for  measuring  the  credit  man's  success 
were  proposed.  Every  success  has  its  measure,  and  in 
his  case  negative  indications  are  as  conclusive  as  positive 
ones.  For  example,  the  amount  of  annual  losses  sus- 
tained through  bad  accounts  is  significant.  It  would  be  a 
questionable  success  if  an  extension  in  the  volume 
of  business  done  were  attended  by  a  disproportionate 
increase  in  the  percentage  of  loss. 

An  interesting  sidelight  is  afforded  by  the  amount  of 
business  declined,  and  shown  to  deserve  this  ruling  by 
reason  of  subsequent  failure  as  reported  by  mercantile 


110  CredUs 

agencies.  Each  instance  of  this  kind  should  be  afterwards 
studied  minutely  in  the  light  of  all  the  facts  that  influ- 
enced the  credit  man's  decision  at  the  time.  It  thus 
becomes  an  instructive  precedent  available  when  similar 
cases  present  themselves.  A  succession  of  such  instances 
will  lead  to  systematized  knowledge. 

As  a  final  conclusion  to  this  discussion  of  the  credit 
man 's  functions  and  qualifications,  it  may  be  well  to  em- 
phasize that  the  viewpoint  has  been  that  of  practical 
utility.  The  considerations  have  been  mainly  those  within 
the  scope  of  every-day  experience.  Not  every  reader  of 
a  cookbook  will  become  a  culinary  expert,  but  all  adepts 
in  cookery  must  have  at  hand  the  information  which  the 
cookbook  contains.  So,  too,  while  the  perusal  of  these 
pages  will  not  alone  qualify  a  man  to  become  an  expert, 
every  efficient  credit  man  must  possess  the  information 
herein  conveyed. 

TEST  QUESTIONS 

1.  What  are  the  significant  points  in  the  cycle  of  trade  de- 
pression and  prosperity  ? 

2.  Along  what  three  lines  should  a  credit  man  study  his  cus- 
tomers ? 

3.  What  are  the  two  principal  standards  for  measuring  the 
credit  man's  success? 

4.  How  may  the  credit  man  be  constructive  rather  than  de- 
structive ? 


COLLECTIONS 

CHAPTER  I 
collections  and  the  collector 

Nature  of  Collections 

Collections,  in  the  broad  general  use  of  the  term,  covers 
everything  that  pertains  to  the  supervision,  checking,  and 
following  of  accounts,  notes,  or  assets  receivable  of  every 
nature  until  the  amounts  which  they  involve  are  realized. 
To  a  degree  commensurate  with  the  care  exercised  in  the 
extension  of  credit  or  with  the  gauging  of  risks  to  the 
profitableness  of  the  business,  it  is  practicable  and 
expedient  to  narrow  consideration  and  application  of 
the  subject  to  such  items  only  as  require  special  treat- 
ment and  attention.  All  accounts,  all  items,  of  course, 
must  be  kept  under  observation;  but  the  larger  number 
of  retail  and  wholesale  accounts,  probably  never  under 
50  per  cent  and  frequently  as  high  as  90  per  cent,  are  paid 
promptly  at  maturity  if  not  before.  With  such  charge 
items,  casual  attention  in  connection  with  the  accounting 
is  all  that  is  necessary. 

The  real  problems  of  the  collector  of  commercial 
accounts,  therefore,  begin  with  the  delinquency  of  the 
debtor,  not  with  the  inception  of  a  credit.  Such  matters 
as  billing  to  prompt-paying  customers  and  crediting  their 
accounts  when  the  payments  are  made,  are  simple  mat- 
ters of  office  routine.  The  collection  manager  should  in- 
Ill 


112  Collections 

stal  an  efficient  system  for  handling  these  items,  to  be 
sure,  but  they  do  not  reach  the  heart  of  his  problems. 

If  we  narrow  the  material  for  consideration,  we  may 
consistently  define  ''collections"  as  the  practice  and 
routine  of  following  delinquent  accounts,  or  other  receiv- 
ables, to  final  liquidation. 

The  Collector's  Task 

The  procedure  on  such  delinquent  accounts  will  vary 
from  the  initial,  simple,  polite  reminder,  either  by  letter 
or  personal  presentation,  to  the  elaborate,  discursive, 
analytic,  constructive  letter  or  interview.  All  these  steps 
and  devices  must  be  considered. 

The  time  consumed,  the  expense  incurred,  as  well  as 
the  ultimate  outcome,  will  depend  to  a  degree  and,  at 
times,  entirely  on  the  general  or  momentary  financial 
condition  of  the  debtor.  Often,  however,  results  depend 
to  an  even  greater  extent  on  the  prompt  first  attention 
and  even  the  persistent, ,  systematic,  intelligent,  even 
scientific  following  by  the  collector.  Prompt  pajnnent 
of  debts  and  close  collections  are  desirable  because  they 
result  in  mutual  benefits  to  debtors  and  creditors.  On 
the  one  hand,  they  tend  to  prevent  the  debtor  from 
becoming  overextended,  and  on  the  other,  they  are  the 
equivalent  of  increased  capital  to  the  creditor. 

The  debtor  may  be  verging  on  insolvency.  If  so,  the 
good  collector  will  probably  be  the  first  to  realize  the 
fact.  His  analysis  of  the  situation  has  prepared  him  for 
constructive  work.  Instead  of  using  the  first  pretext  for 
pushing  the  debtor  over  the  brink,  he  will  probably  con- 
centrate his  ability  and  energy  towards  assisting  the 
debtor  to  such  conversion  of  assets  as  will  assure  pay- 
ment of  the  account  and  re-establish  the  debtor  on  a 
better  footing. 


The  Collector  113 

A  debtor  with  ample  assets  may  be  careless,  slovenly, 
or  ignorant.  In  such  a  case,  the  collector  will  by  kindly 
insistence  combined  with  diplomatic  discussion  of  the 
various  excuses  presented,  not  only  collect  his  account, 
but  at  the  same  time  assist  the  debtor  to  a  realization 
and  improvement  of  his  condition. 

The  debtor  with  small  capital  may  be  doing  a  volume 
of  business  or  extending  credit  disproportionate  to  his 
own  working  investment.  Again  the  collector  by  dis- 
cussing and  analyzing  reasons  for  delinquency  can 
frequently  develop  a  realization  by  the  debtor  that  a 
selection  of  business  most  easily  obtainable,  most  profit- 
able, and  easily  collectible,  will  improve  his  credit  and 
at  the  same  time  increase  his  net  profit. 

The  debtor  may  be  dishonest.  In  such  case  the  col- 
lector's first  and  most  important  work  is  to  convince 
him  that  he  is  an  honest  man.  The  collection  can  then 
be  made  and  the  conviction  of  honesty  may  continue. 

These  few  possibilities  show  that  good  collection  work 
is  constructive,  educative,  developing;  never  destructive, 
demoralizing,  or  oppressive.  A  hard  collection  properly 
worked  out  may  result  in  a  condition  so  much  improved 
as  to  insure  safety  and  easy  collection  of  subsequent 
accounts.  Record  of  the  information  developed  in  the 
course  of  making  collection,  as  to  the  trend  of  a  debtor's 
business,  marks  the  passage  from  safety  to  hazard  in  a 
degenerating  business,  thereby  furnishing  a  logical  basis 
for  declining  further  credit;  or,  it  may  show  when 
recovery  justifies  the  continuance  of  business  relations. 
In  short,  a  record  of  steps,  information,  and  develop- 
ments incident  to  a  systematic  following  of  collections 
is  essential  to  an  intelligent  consideration  of  subsequent 
credit. 


114  Collections 

The  Collectok's  Qualifications 

Probably  no  line  of  business  endeavor  affords  greater 
opportunities  for  the  employment  of  broad  faculties  of 
discernment,  discrimination,  analysis,  decision,  and  per- 
sistence than  does  the  field  of  collections.  To  succeed  in 
this  branch  of  business  one  must  possess  certain  indis- 
pensable or  desirable  qualities  of  personality,  education, 
and  business  training. 

The  collector  should  be  affable,  courteous,  and  con- 
siderate. He  must  be  a  keen  judge  of  human  nature  and 
have  the  ability  quickly  to  adjust  his  line  of  procedure 
to  fit  the  personality  of  the  debtor.  He  should  have  a 
fair  general  education  and  facility  of  expression.  He 
must  be  able  to  grasp  and  understand  the  essentials 
of  the  condition  and  environment  of  the  debtor  in  order 
to  adjust  his  demands  to  the  highest  possible  attainments 
under  the  circumstances.  He  should  be  a  leader  rather 
than  a  driver;  diplomatic,  not  domineering.  He  must, 
after  having"  decided  on  a  course  reasonable  and  fair,  be 
persistent,  unyielding,  and  steadfast;  never,  however, 
offensive.  He  should  be  active,  energetic,  prompt, 
systematic.  He  must  be  open-minded,  straightforward — 
an  example  of  what  he  requires  of  the  debtor.  Being  in 
the  right,  he  may  explain  but  should  not  be  apologetic. 
Claiming,  even  demanding,  his  dues,  he  must  be  gentle- 
manly, persuasive;  never  coarse  nor  insulting.  All  in 
all  the  higher  his  personal  attainments,  character,  and 
training  the  better  his  qualification  for  the  work  he  has 
assumed. 

Relation  of  Collections  to  Other  Departments 

The  relation  of  v  sales,  credits,  accounting,  and  collec- 
tions is  so  close  that  in  a  consideration  of  one  we  must 


The  Collector  115 

at  least  note  and  define  its  points  of  contact  with  the 
others,  so  that  the  furtherance  of  one  function  will 
neither  break  nor  mar  the  harmonious  whole.  Indeed, 
each  unit  sale  embodies  and  includes  the  functions  of 
sales,  credits,  accounting,  and  collection.  A  sale  is 
worthless  until  credit  has  been  checked,  record  made, 
and  collection  effected.  Credit  must  consider  sales  and 
accounting  expense  as  well  as  collection  probability  and 
expense.  Accounting  must  portray  sales  terms  as 
checked  by  credit,  and  present  a  basis  for  collection. 
Collection  must  support  and  justify  credit  by  completing 
the  transactions  started  by  the  sales  department  and 
shown  on  the  records  of  the  accounting  department. 

In  the  smaller  organizations  where  all  divisions  of 
business  are  under  the  supervision  of  one  indi\ddual, 
collection  naturally  follows  lines  which  not  only  justify 
the  credit  but  also  take  into  consideration  future  sales 
and  credit  to  the  same  debtor.  In  larger  institutions 
where  it  is  profitable,  expedient,  and  even  necessary  to 
specialize,  there  is  need  for  some  care  in  order  that  each 
division  will  not  lose  sight  of  the  organization  as  a  whole 
or  of  any  part,  but  rather  will  develop  and  maintain  a 
spirit  of  co-operation. 

Just  where  the  collection  department  should  fit  into 
a  business  organization  is  a  problem  subject  to  all  sorts 
of  exceptions  from  the  ideal.  The  collector's  work  sup- 
plements and  supports  that  of  the  credit  man.  On  the 
other  hand,  the  credit  man  connects  more  closely  with 
the  salesman's  point  of  view.  Hence,  the  logic  of  placing 
collections  under  the  jurisdiction  and  direction  of  the 
credit  man. 


116  Collections 

TEST  QUESTIONS 

1.  Distinguish    between    collections   in    the   broad    general 
sense  and  as  used  in  this  book. 

2.  What  is  the  working  definition  of  collections  given  in  this 
chapter  ? 

3.  What  problems  must  a  collector  consider  in  his  relations 
to  debtors  ? 

4.  What  are  the  outstanding  qualifications  of  a  good  col- 
lector ? 

5.  What  should  be  the  relation  of  the  collection  department 
to  other  departments  in  a  business? 

6.  At  what  position  in  the  organization  of  a  firm  is  the  col- 
lection department  usually  placed? 


CHAPTER  II 

PSYCHOIiOGY   OF   COLLECTIONS 

Success  in  whatever  line,  direction,  or  enterprise  rests 
on  a  correct  mental  conception  of  the  matter  in  hand, 
worked  out  through  mental  and  physical  action.  If  the 
mental  concept  or  the  premise  from  which  it  springs  is 
in  error,  no  amount  of  intelligence  or  energy  can  produce 
a  satisfactory  result.  Certain  lines  of  advertising  or 
sales  campaigns,  for  example,  are  foredoomed  to  failure, 
because  they  do  not  take  into  consideration  the  laws 
which  govern  known  thoughts,  motives,  and  actions. 

These  psychological  generalities  apply  as  well  to  the 
collector  and  his  work  as  to  other  lines  of  endeavor. 
There  are  peculiar  states  of  mind  incident  to  maturing 
and  lapsing  obligations  which,  if  recognized  and  acted 
upon,  simplify  the  collector's  problem,  but  which,  if  not 
understood  or  acted  upon  at  the  right  moment  in  the  right 
way,  may  make  collection  impossible. 

Most  men  are  honest,  some  from  expediency,  more  from 
choice.  They  incur  obligations,  confident  in  their  ability 
to  pay  and  fully  intending  to  do  so.  If  their  confidence 
in  their  ability  rests  on  tangible,  convertible  property 
or  collectible  receivables  with  ample  margin  of  surplus, 
they  will  seldom  go  far  wrong.  If,  on  the  other  hand, 
their  confidence  rests  on  untried  experiments  or  on 
erroneous  conceptions  of  the  convertibility  or  amount 
of  the  assets,  there  develops  a  condition  which  calls  for 
great  care  and  watchfulness  on  the  part  of  the  collector. 

117 


118  Collections 

This  is  especially  true  when  the  ease  develops  to  the 
point  where  there  is  little  or  no  margin  of  safety. 

Mental  State  When  Debt  Was  Incurred 

In  approaching  a  debtor,  a  knowledge  of  the  mental 
concept  that  resulted  in  the  incurring  of  the  liability  is 
frequently  valuable.  The  mere  fact  of  the  delinquency 
proves  that  there  was  an  error  of  judgment  unless,  as  is 
too  frequently  the  case,  the  debt  was  contracted  without 
due  consideration  of  the  element  of  time  or  under  a 
belief,  possibly  warranted  to  a  degree  by  previous  indul- 
gences, that,  regardless  of  a  specific  maturity  date  agreed 
upon,  it  is  unreasonable  to  consider  terms  of  maturity 
from  any  other  standpoint  than  the  convenience  of  the 
debtor. 

If  the  delinquency  is  found  to  be  caused  by  an  error 
of  judgment  in  contracting  the  obligation,  or  if  a  change 
of  conditions  or  environment  that  could  not  reasonably 
have  been  foreseen  has  occurred,  the  attitude  and  pro- 
cedure of  the  collector  should  be  so  shaped  as  to  conform 
to  these  facts  and  to  assist  the  debtor  in  recovering  from 
his  embarrassment.  If,  on  the  other  hand,  the  delin- 
quency is  traceable  to  a  habit  or  disposition  of  the  debtor 
to  ignore  or  consider  of  no  importance  the  time  element 
of  the  transaction,  or  to  a  belief  that  he  has  an  inherent 
right  or  option  to  readjust  maturity  to  his  own  conven- 
ience as  it  later  develops;  or,  if  he  has  incurred  the 
indebtedness  in  a  vague,  haphazard  way  and  -udthout 
any  specific  source  of  funds  for  payment  in  view,  these 
facts  should  be  considered  by  the  collector.  His  pro- 
cedure then  should  be  shaped  along  more  drastic  lines 
for  realizing  fully  and  quickly  the  amount  due.  He 
should  work  not  only  for  realization,  but  \vith  the  view  of 
disciplining  the  debtor,  adjusting  his  understanding  as 


Psychology  119 

to  terms,  and  instilling  in  his  mind  the  importance  of  con- 
sidering ways  and  means  for  payment  as  well  at  the  time 
of  incurring  liability  as  afterwards. 

Mental  States  Afteb  Debt  Is  Incukked 

The  collector  should  consider,  likewise,  the  state  of 
mind  or  the  mental  attitude  of  the  debtor  at  various 
stages  after  maturity  of  his  obligation.  If  he  makes  a 
close  psychological  study  of  debtors  in  general,  he  will 
discover  a  stage  of  mental  unrest,  even  discomfort, 
with  practically  everyone.  This  begins  to  be  manifest 
shortly  before  the  maturity  of  an  obligation,  particularly 
if  means  for  payment  are  not  in  hand,  and  becomes  acute 
right  at  maturity.  It  then  gradually  wears  away,  so 
that  within  a  few  days  after  the  acute  stage  of  agitation 
is  over  the  thought,  or  even  a  reminder  of  the  obligation, 
does  not  seem  to  spur  the  debtor  to  special  effort  as 
would  have  been  the  case  right  at  the  time  of  maturity. 

A  little  pressure  brought  to  bear  during  the  acute  stage 
of  unrest,  reinforced  as  it  is  by  the  debtor's  mental  state, 
generally  causes  him  to  bend  all  his  energy  towards 
liquidation,  resulting  often  in  immediate  payment,  or 
almost  certainly  at  least  in  a  much  shorter  period  of 
delinquency.  The  collector  having  in  mind  this  same 
mental  unrest  at  maturity  demands,  and  insists,  that  the 
debtor  agree  to  another  fixed  date  in  case  he  is  absolutely 
unable  to  pay  promptly.  Debtors  accustomed  to  ignoring 
terms  can  at  this  stage  be  impressed  with  an  understand- 
ing of  the  importance  of  preparing  for  payment  at  ma- 
turity. It  is  true,  however,  that  even  with  the  weight  of 
improbable  further  leniency,  the  unrest  will  be  less  acute 
at  the  second  maturity,  and  will  probably  become  less  dis- 
tressing with  each  succeeding  postponement.  To  counter- 
balance  this   increasing   tendency   to    indifference,    the 


120  Collections 

debtor  must  be  made  to  understand  in  no  uncertain  terms 
that  the  one  extension  is  final  and  that  when  the  obliga- 
tion again  matures  it  must  be  met  promptly. 

The  Collector's  Mental  Attitude 

While  considering  the  psychology  of  the  debtor  both 
at  the  time  of  contracting  the  debt  and  its  maturity,  the 
collector  should  give  thought  to  his  own  frame  of  mind 
so  that  he  may  not  unconsciously  shape  his  approach  and 
procedure  along  lines  that  will  tend  to  develop  antag- 
onism or  carelessness  and  thus  make  the  attainment  of 
his  object  more  difficult  and  expensive.  He  must  recog- 
nize the  lines  of  least  resistance  in  the  collection  of 
accounts,  and  then  studiously  adapt  all  his  means  to  the 
attainment  of  his  purpose. 

The  collector  need  not  be,  indeed,  it  is  better  that  he 
should  not  be,  apologetic.  Having  a  right  to  expect  from 
the  standpoint  of  business  ethics  that  the  debtor  intended 
to  pay  at  maturity  and  had  prepared  to  do  so,  the 
collector  can  very  logically  base  his  first  polite  reminder 
on  the  assumption  of  oversight.  After  the  collection 
process  has  been  set  in  motion,  the  development  and 
degree  of  insistence  in  the  collection  methods  will  depend 
on  the  debtor's  response  or  failure  to  respond,  on  a  study 
and  review  of  the  original  basis  for  the  credit,  and  on  a 
tracing  of  developments  in  and  around  the  debtor's 
affairs  down  to  date.  The  collector  cannot  be  too  careful 
in  checking  his  own  mental  attitude  toward  the  debtor 
and  his  problems  on  every  one  of  these  points.  The 
methods  he  uses  as  well  as  the  results  he  obtains  will  in 
each  case  reflect  his  understanding  of  the  psychology  of 
collections.  The  collector  needs  to  be  profoundly  con- 
scious all  the  time  of  the  fact  that  he  is  dealing  with 
varied  human  minds  in  a  peculiar  mental  state. 


Psychology  121 

TEST  QUESTIONS 

1.  How  is  psychology  related  to  collections  ? 

2.  Why  is  it  important  to  consider  the  psychology  of  the 
debtor  at  the  time  the  debt  is  incurred? 

3.  What  are  the  two  typical  states  of  mind  among  debtors 
at  that  point? 

4.  How  is  each  case  to  be  handled  at  the  beginning? 

5.  Explain  the  "mental  unrest"  of  the  debtor. 

6.  \  In  what  respect  should  the  collector  constantly  check 
his  own  attitude  of  mind  ? 


CHAPTER  III 

BASIS    FOR    THE    DEBT 

The  source  of  the  debt,  or  the  consideration  for  which 
it  was  incurred,  has  a  decided  bearing  on  the  ability  and 
preparedness  of  the  debtor  for  payment.  Where  col- 
lection calls  for  attention  more  elaborate  than  simple 
presentation  of  claim,  the  source  of  the  debt  should 
receive  due  consideration  in  developing  the  plan, 
sequence,  and  frequence  of  attention. 

Debts  for  Merchandise 

Where  the  debt  has  been  incurred  in  the  purchase  of 
merchandise  or  commodities  for  resale,  the  collector 
should  inform  himself  to  what  extent  resale  has  been 
effected.  He  should,  however,  do  this  in  such  manner 
as  to  give  the  debtor  no  ground  for  urging  unsold  goods 
as  an  excuse  for  deferring  payment,  and  in  a  way  to 
avoid  giving  him  any  rights  or  options  other  than  those^ 
stated  in  the  original  contract.  The  probability  of  resale 
in  the  light  of  general  demand,  season,  environment,  and 
whatever  other  conditions  have  a  bearing  on  the  case, 
should  have  been,  and  probably  was,  considered  in 
checking  the  credit.  It  is  well,  however,  in  case  of 
delinquency,  to  review  these  data  so  that  conclusions  may 
be  readjusted  if  an  error  has  been  made.  Where  other 
resources  for  payment  are  either  lacking  or  inadequate, 
or  where  the  resale  cannot  be  accomplished  through  the 

122 


Basis  for  Debt  123 

granting  of  further  time,  the  goods  may  frequently  be  re- 
possessed and  the  loss  minimized  thereby. 

Debts  foe  Equipment 

Debt  incurred  for  machinery,  equipment,  or  other 
operating  facilities  must  be  considered  from  the  stand- 
point of  profitable  production  or  use.  Only  slight 
consideration  can  usually  be  given  to  the  convertible 
value  of  the  articles  themselves.  If  repossession  must 
be  considered,  the  effect  of  time  on  the  depreciation  of 
the  asset,  whether  it  was  in  use  or  idle,  should  be  fully 
considered. 

Debts  for  Business  Expense 

A  debt  for  business  expense  which  has  no  direct  reflex 
in  tangible  assets  must  be  considered  in  its  bearing  on 
profitable  production  or  conversion  of  property.  Its  pay- 
ment depends  on  realization  from  the  articles  produced 
or  converted.  A  debt  incurred  for  business  expenses 
will  necessarily  have  to  be  treated  in  such  manner  as  to 
make  possible  the  profitable  operation  of  the  business 
and  the  final  realization  of  the  debt  out  of  profits. 

Debts  for  Personal  Expenses 

A  debt  for  personal  expense  such  as  food,  clothing, 
schooling,  etc.,  has  no  counter  assets,  and  further,  does 
not  increase  the  convertible  value  of  assets.  Its  payment 
must  be  made  from  capital  or  current  earnings  of  the 
debtor.     It  is  the  least  justifiable  of  all  debts. 

Debts  for  Capital  Outlay 

Indebtedness  against  real  estate  and  for  capital  invest- 
ment depends  for  liquidation  on  the  convertibility,  use. 


124  Collections 

or  operation  of  the  property  against  which  the  debt  is 
incurred.  Liquidation  in  such,  cases  is  usually  a  slow  and 
tedious  process  involving  many  legal  formalities  and 
proceedings.  Such  property  frequently  shrinks  to  but 
a  fraction  of  its  anticipated  value  if  foreclosure  pro- 
ceedings are  necessary. 

Foundation  foe  Collection 

Intelligent  classification  and  study  of  the  basis  of  the 
debt  in  its  relation  to  the  source  from  which  means  for 
liquidation  must  be  derived  is  the  foundation  for  con- 
structive collection  procedure,  and  results  are  frequently 
dependent  on  a  correct  understanding  and  development 
of  this  underlying  stnicture. 

TEST  QUESTIONS 

1.  Why  is  the  source  of  the  debt  an  important  consideration 
in  collection  work? 

2.  How  is  this  question  related  to  debts  for  merchandise? 

3.  What   tests   should   be   applied   to   debts  incurred   for 
equipment  ? 

4.  Wliat  are  the  characteristics  of  debts  incurred  for  busi- 
ness expenses? 

5.  What  can  you  say  about  debts  incurred  for  personal 
expenses  ? 

6.  AVhat  special  points  should  the  collector  consider  in  deal- 
ing with  debts  for  capital  outlay  ? 


CHAPTER  IV 

TERMS 

Their  Meaning 

In  collections,  "terms"  is  used  in  a  restricted  sense 
and  has  reference  to  the  length  of  time  for  which  the 
credit  is  to  run.  To  a  degree  the  form  in  which  the 
record  or  acknowledgment  of  the  debt  stands  is  also 
embodied  in  the  terms;  that  is,  the  obligation  may  rest 
on  a  simple  record  called  an  open,  or  ledger  account, 
or  it  may  be  evidenced  by  a  note  or  some  other  document 
or  documents  signed  by  the  debtor. 

Clear  Definition 

For  collection  reasons  terms  should  be  clearly  defined 
and  understood  by  both  creditor  and  debtor,  because, 
undoubtedly,  a  large  percentage  of  collection  difficulties 
and  delinquencies  are  the  direct  result  of  ignorance  or 
misunderstanding  of  terms.  When  the  terms  are  clearly 
defined  and  understood,  there  should  be  no  occasion  for 
the  creditor  to  demand  pajment  or  even  to  remind  the 
debtor  of  the  pending  or  past  maturity.  Debtors  do 
default,  how^ever,  to  such  an  extent  that  it  has  become 
common  practice  to  send  periodical  reminders  (generally 
monthly  statements)  showing  terms,  or  maturity  date, 
or  both,  to  debtors  on  open  account.  On  notes  or  similar 
obligations,  a  single  notice  of  maturity  is  sent  a  short 
time  before  the  obligation  falls  due. 

125 


126  Collections 

Actual  Practice 

Where  the  terms  applying  to  each  transaction  are 
definitely  stated,  the  start  towards  effecting  collection 
is  simple  and  unlikely  to  develop  friction  or  dispute. 
Where  similar  transactions  between  the  same  parties 
or  covering  the  same  commodities  are  frequent  so  that 
terms  become  standardized,  as  it  were,  the  practice  of 
omitting  definite  statement  of  the  terms  in  each  trans- 
action or  referring  to  them  as  ''regular"  has  become 
prevalent.  This  practice  is  a  convenience,  but  it  opens 
an  opportunity  for  disagreement,  particularly  where 
different  commodities  carrjdng  different  terms  are  em- 
bodied in  one  transaction  or  where  for  some  reason  an 
exception  to  regular  terms  has  previously  occurred 
between  the  parties. 

Then  again  in  certain  communities  terms,  particularly 
in  retail  transactions,  are  very  loosely  construed  and  are 
likely  to  mean  no  more  to  the  debtor  than  "his  conven- 
ience." In  such  cases  about  the  only  procedure  open  to 
the  creditor  is  to  assume  that  a  "reasonable"  time  has 
elapsed  and  to  demand  payment.  If  he  fails  to  get 
satisfactory  returns  on  that  basis,  he  should  then 
endeavor  to  reach  an  agreement  with  the  debtor  as  to 
maturity. 

The  collector  should  use  his  influence  to  the  utmost  to 
break  up  such  loose  practice,  and  should  insist  either  on 
a  standardization  of  terms  so  far  as  the  trade  of  his  house 
is  concerned,  or,  if  standardization  is  not  practicable, 
on  a  specific  agreement  with  regard  to  terms  on  each 
credit  transaction. 

The  collector  is  interested  in  terms,  not  only  on  account 
of  the  desirability  of  being  sure  of  his  ground  so  as  to 
avoid  all  occasion  for  dispute,  but  also  on  account  of  the 


Terms  127 

psychological  and  financial  bearing  of  such  factors  as 
short  terms,  long  terms,  and  maturities  at  logical  times 
or  seasons.  Every  business  enterprise  will  find  it  advan- 
tageous to  standardize  its  terms  or  if  standardization  is 
impracticable,  so  to  adjust  them  that  accounts  of  its 
debtors  fall  due  under  conditions  when  payments  are 
most  easily  and  willingly  made. 

TEST  QUESTIONS 

1.  What  is  the  significance  of  the  word  "terms"  in  collec- 
tion procedure  ? 

2.  How  does  clearness  and  definiteness  in  terms  aid  the 
collection  of  accounts? 

3.  What  is  meant  hy  describing  terms  as  ' '  regular ' '  ? 

4.  For  what  two  main  reasons  is  the  collector  interested  in 
the  terms  of  a  sale? 


CHAPTER  V 

FORM    OF   THE    DEBT 

In  the  contract,  whether  a  simple  order  for  goods  or 
something  more  formal,  the  stipulation  as  to  the  form 
of  the  record  or  the  certification  of  the  indebtedness  is 
usually  specified  in  connection  with  the  terms  and  con- 
sidered as  a  part  thereof.  These  forms  of  a  debt  and 
their  significance  deserve  some  consideration. 

Where,  in  the  ordinary  commercial  order  or  contract, 
the  form  of  the  obligation  is  not  stipulated,  it  is 
customary  to  assume  that  the  simplest  fonn;  viz.,  the 
open  account  is  understood,  unless  local  custom  or  general 
practice  in  connection  with  the  commodity  covered 
decrees  otherwise.  An  open  or  ledger  account  is  a  simple, 
abbreviated  record,  or  memorandum,  of  the  fulfilling  of 
a  contract  or  order  of  purchase,  and  usually  consists  of 
name  and  address  of  debtor,  date  of  transaction,  terms, 
and  amount.  This  record  may  be  kept  in  a  bound  or 
loose-leaf  ledger  or  on  a  card  in  a  card  file. 

An  open  account  rests  on  an  invoice,  which  gives  in 
addition  to  the  data  carried  to  the  ledger  record,  numbers, 
description,  weights,  or  other  matter  necessary  to  identify 
the  articles  covered  and  the  essentials  of  the  contract. 
The  invoice,  where  delivery  of  the  goods  has  been  made 
by  common  carrier,  is  usually  accompanied  by  a  bill  of 
lading,  or  other  evidence  of  delivery  to  the  carrier,  and 
mailed  to  the  purchaser,  now  the  debtor.  The  invoice  and 
the  bill  of  lading  both  rest  on  the  original  memorandum, 

128 


Form  of  Debt  129 

order,   or   contract,   which,   of   course,    constitutes   the 
evidence  of  a  sale. 

Secured  Accounts 

Where  for  any  reason  the  seller  or  creditor  in 
connection  with  an  open  account  requires  security  or 
guarantee  of  assurance  of  payment  other  than  the 
promise  and  financial  strength  of  the  debtor,  agreement 
in  detail  with  regard  to  security  is  embodied  in  the 
contract  of  sale  and  purchase  or  in  a  supplemental 
contract  or  correspondence  connected  therewith.  Where 
the  security  is  personal,  that  is,  an  agreement  on  the  part 
of  a  third  party  to  pay  in  case  of  default  of  the  principal 
debtor,  it  usually  is  in  the  form  of  a  written  obligation 
more  or  less  formal.  In  some  cases  it  is  covered  by  a 
simple  letter  from  the  guarantor  to  the  creditor  stating 
that  the  guarantor  will  insure  payment  of  the  obligation. 
A  simple  and  effective  form  for  such  guarantee  may  be 
as  shown  in  Figure  1. 

A  few  legal  points  deserve  consideration  in  this  con- 
nection. The  statute  of  frauds,  generally  adopted  in  the 
United  States,  provides,  among  other  things,  that  no 
action  shall  be  brought  whereby  to  charge  the  defendant 
upon  any  special  promise  to  answer  for  the  debt  of 
another  person,  unless  the  agreement  upon  which  such 
action  is  based  is  in  writing  and  signed  by  the  party  to 
be  charged.  Such  a  contract  must  be  supported  by  a  suf- 
ficient consideration.  If  the  contract  between  the  cred- 
itor and  the  debtor  is  induced  by  the  surety's  promise  to 
the  creditor,  the  making  of  such  a  contract  is  sufficient 
consideration.  However,  if  the  surety's  promise  is  sub- 
sequent to  the  creation  of  the  debt,  there  must  be  some 
new  consideration  or  the  promise  is  void. 


130  Collections 


,191. 


The  Jackson  Lumber  Company, 
Busytown,  Washington. 

Gentlemen : 

In  consideration  of  your  now  and  hereafter  extending 

credit  as  you  may  see  fit  to of 

the  undersigned of do 

hereby  guarantee  to  you,  your  successors,  and  assigns, 
the  payment,  when  due,  of  any  and  all  accounts  and 
indebtedness  now  due  or  to  become  due  for  or  on  account 
of  goods  and  merchandise  sold  or  advanced  or  hereafter 
to  be  sold  or  advanced  by  you  or  your  successors  and 
assigns  to  said or  to order. 

Notes  and  other  evidences  of  indebtedness  and  secu- 
rities may  be  received  by  you,  your  successors,  and 
assigns,  on  account  or  in  settlement  of  the  indebtedness 
hereby  guaranteed,  and  may  be  renewed  and  extended 
as  you  or  your  successors  and  assigns  desire,  and  the 
principal  contract  may  be  modified  or  dealt  with  in  any 
way  without  notice  to  the  undersigned,  without  in  any 
way  impairing  or  affecting  the  liability  and  obligation 
under  this  guaranty  for  any  amount  remaining  unpaid 
in  cash  to  your  company  or  its  successors  and  assigns. 

Notice  to  the  undersigned  of  the  acceptance  of  this 
guaranty  and  of  sales  or  advances  made  or  to  be  made 
thereunder  and  of  any  default  on  the  part  of  said 
is  hereby  waived. 

This  guaranty  to  be  a  continuing  one,  and  to  remain 
in  full  force  and  effect  until  the  written  revocation  there- 
of is  received  by  your  company  or  its  successors  and 
assigns. 


Fig.  1. — Form  of  a  Personal  Guarantee  for  an  Account 


Form  of  Debt 


131 


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132  Collections 

If  the  security  is  to  be  by  mortgage,  it  is  customary 
to  close  the  account  by  note,  the  note  to  be  secured  by 
mortgage.  If,  however,  the  account  is  to  be  continuous 
and  changing  from  time  to  time,  the  mortgage  may  be 
connected  with  the  account  by  proper  agreement  and 
stipulation  in  the  mortgage  itself  in  order  to  make  it 
unnecessary  to  close  by  note. 

Notes 

The  form  next  most  prevalent  is  the  plain  note  some- 
times called  a  ''note  of  hand."  Use  of  such  notes  is  fre- 
quently made  in  connection  with  the  ordinary  transac- 
tions covered  by  invoice  and  open  account,  carrying  the 
process  a  step  farther,  or,  in  common  parlance,  "closing 
the  account  by  note."  The  note  itself  is  the  original 
document  of  record  where  the  transactions  involve  bank- 
ing credits  or  other  loaning  of  money  or  credit. 

The  usual  form  of  plain  note  consists  of  address  and 
date  and  a  promise  to  pay  to  the  creditor,  or  his  order, 
at  a  specified  time  and  place  the  amount  covered  by  the 
transaction  with  interest,  signed  by  the  debtor.  Figure 
2  shows  the  familiar  blank  form. 

This  simple  form  may  be,  and  frequently  is,  elaborated 
by  special  a.greement  with  respect  to  the  payment  of 
attorney's  fees  in  case  suit  is  necessary,  and  other 
agreements  in  most  frequent  use  in  notes  are:  retainer 
agreements  customary  or  exacted  by  the  creditor.  Such 
of  title  to  articles  for  which  the  note  is  given ;  provision 
constituting  the  holder  the  agent  of  the  maker  with  power 
to  confess  judgment  in  case  of  default;  provision  in  notes 
issued  in  series  under  which  default  in  payment  of  any 
one  in  the  series  matures  the  succeeding  notes  of  the 
series.  Such  provisions  do  not  affect  the  negotiable 
character  of  a  note.    It  must  be  borne  in  mind,  however, 


Form  of  Debt 


133 


134  Collections 

that  some  of  these  are  illegal  in  some  states  and  that  they 
are  restricted  in  others ;  hence,  such  forms  should  not  be 
adopted  except  under  legal  advice.  One  such  form  is 
shown  in  Figure  3. 

Secuked  Notes 

Special  provision  for  assuring  payment  is  more  preva- 
lent in  connection  with  notes  than  with  open  accounts. 
Such  provision,  called  security,  occurs  in  numerous 
forms  of  varying  significance  and  efiQcacy,  and  calls  for 
collection  treatment  according  to  the  custom  and  the  law 
appertaining  to  each  case. 

Personal  Security 

The  most  simple  form  of  security  is  that  known  as 
*' personal,"  and  is  evidenced  by  the  signature  of  one  or 
more  persons  (other  than  the  maker),  who  thereby 
become  sureties  or  guarantors  for  the  debt.  The 
additional  signature  or  signatures  may  be  written  on  the 
face  of  a  note  under  that  of  the  maker,  in  which  case 
they  are  designated  as  "security"  or,  in  some  localities 
or  under  certain  conditions,  as  "joint  makers."  The 
note  is  then  known  as  a  "joint  note"  or  a  "joint  and 
several  note."  The  additional  names  may  be  written 
across  the  back  of  the  note  and  the  persons  so  signing 
are  then  known  as  "indorsers"  or  "surety  by  indorse- 
ment. ' ' 

An  indorsement  may  consist  of  a  plain  signature,  or 
it  may  be  qualified  by  limitations  written  or  printed 
either  on  the  back  above  the  signature  or  on  the  face  in 
the  body  of  the  note  above  the  signature  of  the  maker. 

An  indorsement  by  the  original  payee  of  the  note 
whether  in  blank,  which  makes  the  note  payable  to  bearer, 
or  specifically  to  a  third  party  named,  binds  the  indorser 


No.- 
$ 

with 


The  I 
other 
herea 
may 


With  i! 
as  will 
holder 
whole  < 
said  Be 
other  U 
thereto 
Bank,  i 
the  leg; 
whom  I 
and,  ai 
apply  t: 
(makinj 
hereof, 
and  ma 
authoria 
signed, 
have  be 
balance 


For  Value  Re 

fo:r.tly  and  srverally  gcarai 
With  seven  per  cent.  Ini^i 
agree  to  pay  all  costs,  exf 
coUectlne  the  same  from, 
more  of  the  makers.  end( 
waive  any  and  all  demand. 


ADDR] 


Dne ... 

Chicago.  Uu.  191 

days  alter  date,  for  valae  received. 


I  promise  to  pay  to  the  order  o( 
CONTINENTAL  AND  COMMERCIAL  NATIONAL  BANK  OF  CHICAGO,  a(  its  office. 

.       ..DOLLARS, 

with  interest  at  the  rale  of  seven  per  cent,  per  annnm  after  maturity  nntil  paid. 
Sign  here;  I 


also  below  [ 

The  undersigned  has  deposited  with  said  Bank,  as  collateral  security  for  the  payment  of  the  above  note,  and  of  every 
other  liability  or  liabilities,  either  direct  or  contingent,  now  owing  or  which  may  hereafter  be  owing,  whether  now  oi 
hereafter  contracted,  of  the  undersigned  (including  all  liabilities  of  any  partnership  created  while  the  undersigned, 
may  have  been  or  be  a  member  thereof)  to  said  payee,    or  to  the  legal   holder  thereof,  the  following  property,  viz: 


With  the  right  on  the  part  of  the  said  Bank  or  the  legal  holder  hereof  from  time  to  time  to  call  for  addiiion. 
as  will  be  satlisfactory  to  said  Bank  or  the  legal  holder  hereof,  and  on  failure  to  respond,  or  if  in  the  )iidg 

holder  hereof,  said  security,  or  anv  additions  thereto  or  subsriiutes  therefor  or  any  part  thereof,  shall  have  depreciated  in  talue,  thei 
whole  of  the  above  note  shall  be  aeemed  immediately  payable  at  the  election  of  ttie  said  Bank  or  the  k-gal  holder  hereof,  with  full  power  ui 
said  Bank,  or  the  legal  holder  hereof  on  maturity  thereof,  either  by  its  terms  or  by  election  as  alorcsaid,  ur  on  ilie  non-payment  of  any  otthe 
other  Labilities  above  mentioned,  to  at  any  time,  and  from  lime  to  lime,  sell,  assign  and  deliver  the  whule  of  said  properly  and  all  addiliuns 
thereto  and  substitutes  therefor,  or  any  part  of  said  property,  additions  and  substitutes,  at  any  public  or  private  sale,  at  the  option  of  said 
Bank,  or  the  legal  holder  hereof,  and  without  advertising  the  same  and  without  notice  lo  the  undersigned,  and  with  the  right  of  said  Bank  or 
Uie  legal  holder  hereof,  to  be  a  purchaser  at  any  public  sale  or  sales;  and  in  the  event  of  any  sale  or  purchase  hereunder  no  matter  by  or  to 
whom  made,  all  notice  thereof,  and  any  and  all  equity  or  right  of  redemption,  whether  before  or  after  sale  hereunder  is  hereby  expressly  waived; 
and,  after  deducting  all  legal  and  other  costs  and  expenses,  including  reasonable  alttirneys  fees,  from  the  proceeds  o(  such  sale  or  sales,  to 
apply  the  remainder  on  any  one  or  more  of  said  liabilities,  whether  due  or  not,  as  said  Bank  or  the  legal  holder  hereof  shall  deem  proper 
(making  rebate  of  interest  on  any  demands  not  matured),  and  return  the  surplus,  if  any,  to  the  undersigned.  Said  Bank  or  the  legal  holder 
hereof,  may  at  its,  his  or  their  discretion  enforce  the  collection  of  said  security,  additions  thereto  and  substitutes  therefor  by  suit  or  otherwise, 
and  may  surrender,  compromise,  release,  renew,  extend  or  exchange  all  or  any  of  the  same.  Said  Bank  or  the  legal  holder  hereof  is  hereby 
authorized  and  empowered  at  any  time  to  apply  to  the  payment  of  any  liability  or  liabilities,  whether  the  same  be  due  or  not,  of  ihe  under- 
signed, to  said  Bank,  or  to  the  legal  holder  hereof,  (including  any  liability  or  liabilities  of  any  partnership  created  while  ihe  undttsigned  may 
have  been  or  be  a  member  thereof),  whether  the  same  be  due  nr  not.  all  property  real  and  personal,  of  every  kind  and  description,  including 
balance?,  credits,  collections,  moneys,   drafts,  checks,  notes,  bills    or  accounts  (whether  on  hand  or  in  transit]  of  the  undersigned 

Sign  here;  ( 


also  above  I 


For  Valus  Racilxd, 


# 


^C^(ved,  wo,  the  'inderslgred,  do  hereb> 
itee  the  payment  of  the  within  note  at  maturity 

est  per  anrrum  from  maturity  until  paid,  and 
)enses  and  attorneys'  fees  paid  or  Incurred  in 

Oi  in  prosecuting  any  suit  against  any  one  OT 
)rsers  or  guarantors  of  said  note,  and  hereby 
nctice,  protest  and  notice  of  protest. 


V  Form  of  Debt  135 

as  surety  for  the  payment  of  the  note  to  the  legal  holder 
in  due  course,  unless  his  indorsement  be  preceded  by 
the  words  '* without  recourse."  The  holder  of  a  plain 
indorsed  note  can  elect,  after  making  legal  demand  on 
the  maker,  to  enforce  payment  from  such  transferring 
indorser,  leaving  it  to  the  latter  to  proceed  against  the 
maker  and  prior  indorsers,  if  there  are  any. 

The  relation  and  obligations  of  maker,  payee,  and 
indorsers  of  notes  are  covered  by  various  statutes  in 
greater  or  less  detail,  and  the  holder  should  see  that  all 
collection  procedure  conforms  strictly  to  the  requirements 
of  such  laws  in  the  several  states  so  that  the  rights  of 
all  parties  at  interest  may  receive  the  protection  con- 
templated. Brief  tabulated  digests  of  these  laws  revised 
from  time  to  time  may  be  procured  as  quick  reference 
guides  upon  these  questions.  All  important  cases  should 
be  preceded  by  legal  investigation  before  action  is  taken. 

Collateral 

Another  common  method  for  securing  notes  is  by 
collateral.  This  consists  in  depositing  with  the  payee  or 
holder  of  the  note,  bonds,  certificates  of  stock,  notes  by 
other  makers,  secured  or  unsecured,  warehouse  receipts, 
or  other  negotiable  documents  representing  value.  The 
conditions  under  which  collateral  security  is  deposited 
and  held  are  generally  covered  by  a  special  contract 
embodied  in  or  attached  to  the  note  so  secured,  or  by  a 
separate  contract  or  receipt.  In  either  event  procedure 
should  follow  lines  sanctioned  by  custom  and  law.  Figiire 
4  illustrates  such  a  collateral  note. 

Notes  pledged  as  collateral  security  are  usually  placed 
with  the  pledgee.  It  is  his  duty  to  collect  any  interest 
payments  due  on  the  note,  all  partial  payments,  if  any, 
and  the  principal  itself  at  maturity.    He  should  take  all 


136  Collections 

the  legal  steps  required  in  such  cases,  notify  indorsers, 
and  do  everything  that  a  holder  in  regular  course  would 
do  to  secure  payment.  He  may  even  sue  for  any  pay- 
ments due  on  such  a  note  held  by  him  as  security. 
Amounts  collected  on  collateral  notes,  less  expense  of  col- 
lection, should  be  indorsed  on  the  principal  note  until  it 
is  paid  in  full  with  interest.  After  such  liquidation  of 
the  principal  note,  the  residue,  if  any,  of  the  collateral 
notes,  or  proceeds  of  collection  therefrom,  is  turned  over 
with  the  canceled  principal  note  to  its  maker. 

In  case  the  note  secured  by  collateral  is  not  paid  at  or 
before  its  maturity,  the  pledgee  may  either  proceed 
personally  against  the  debtor  on  the  original  debt,  or 
procure  satisfaction  by  enforcing  the  pledge  by  sale  of 
collateral,  in  accordance  with  the  terms  of  the  contract. 
Such  sale  may  generally  be  made  without  a  judicial  de- 
cree. Stocks  so  pledged  are  usually  assigned  in  blank 
and  may  readily  be  transferred  to  any  purchaser.  The 
pledgor  frequently  waives  notice  of  sale  and  any  particu- 
lar method  of  sale.  The  sale  should  always  be  made  in 
such  a  manner  as  to  secure  the  best  price  for  the  security, 
and  for  this  reason  a  public  sale  is  to  be  preferred  to  a 
private  sale.  The  proceeds  are  then  applied  to  the  pay- 
ment of  the  debt,  and  the  pledgor  is  charged  with  any 
deficiencies  or  credited  with  any  surplus. 

Where  foreclosure  and  sale  of  collateral  become 
necessary,  great  care  should  be  exercised  as  to  formalities 
required  by  law,  as  these  vary  in  different  states. 

Mortgage 

Notes  are  frequently  secured  by  mortgage  on  personal 
property  or  on  real  estate,  or  on  both.  Mortgages  on 
personal  property  may  be  a  conditional  transfer  direct 
to  the  payee  or  holder  of  certain  specifically  described 


Form  of  Debt  137 

movable  property  as  security  for  payment  of  a  note  or 
notes  described  or  copied  in  the  instrument  of  transfer 
known  as  a  ''chattel  mortgage";  or,  a  transfer  of  title 
to  such  property  to  a  third  party  as  trustee,  authorizing 
him  in  case  of  default  to  convert  the  property  into  cash 
to  be  used  in  payment;  (1)  of  the  expenses  incident  to 
the  trust,  (2)  of  the  principal  and  the  interest  of  the  se- 
cured obligation,  and  (3)  of  the  balance,  if  any,  to  be  paid 
over  to  the  mortgagor. 

The  important  features  of  a  chattel  mortgage  or 
chattel  trust  deed  are  a  careful  detailed  description  of 
the  article  or  articles  covered  so  that  they  may  be  easily 
identified,  a  complete  description  or  copy  of  the  note 
secured,  and  full  provision  for  foreclosure  in  case  of 
default,  such  provisions  conforming  closely  to  statutes 
covering  such  documents  and  to  the  filing  or  recording 
thereof  in  the  office  of  public  recorder  or  magistrate  as 
required  by  law. 

Mortgages  or  trust  deeds  against  real  estate  are  simi- 
lar in  provision  to  those  on  chattels  except  that  they  are 
more  formal  as  to  form  and  requirements  with  regard  to 
record  and  release. 

Possession  of  Mobtgaged  Property 

Under  mortgages  and  trust  deeds,  both  chattel  and 
real  estate,  right  of  possession  and  use  of  the  property 
pledged  remain  in  the  mortgagor  until  default  and  formal 
possession  is  taken  by  the  mortgagee  or  trustee  or  some 
officer  representing  his  interest  under  form  and  process 
of  law.  Collection  of  obligations  secured  by  these  or 
other  special  means  for  guaranteeing  payment  follow  a 
procedure  similar  to  that  applying  to  unsecured  debts, 
except  that  great  care  must  be  exercised  to  preserve  the 


138  Collections 

legal  status  so  that  enforcement  against  the  security,  if 
necessary,  may  not  be  jeopardized. 

Extensions 

In  collecting  accounts  or  notes  it  often  becomes 
necessary  to  grant  an  extension  of  additional  time,  and 
as  consideration  for  such  extension  security  is  frequently 
tendered  or  exacted  even  though  they  were  not  previously 
secured.  On  items  previously  secured,  additional  or 
more  desirable  security  is  often  required  or  given.  This 
is  good  practice  even  where  there  is  little  danger  of 
ultimate  loss  on  the  existent  security  or  even  of  the 
necessity  for  enforcement  against  the  security,  because 
the  ordinary  debtor  will  begin  earlier  and  exert  himself 
more  continuously  in  an  effort  to  provide  for  prompt 
payment  of  a  fully  secured,  than  of  a  partially  secured, 
or  wholly  unsecured,  obligation.  He  is  confronted  not 
only  with  a  loss  of  prestige  and  credit  standing,  but  also 
with  the  expense  and  loss  of  value  incident  to  enforce- 
ment against  the  security.  In  all  agreements  for  the 
extension  of  time  or  change  of  terms,  and  particularly 
with  secured  claims,  great  care  should  be  exercised  in 
order  to  have  the  agreement  conform  mth  legal  pro- 
visions of  a  binding  contract,  including  the  factor  of 
"consideration." 


TEST  QUESTIONS 

1.  What  is  meant  by  an  open  account? 

2.  Of  what  value  is  the  invoice  from  a  collector's  stand- 
point?   The  bill  of  ladmg? 

3.  What  is  meant  by  a  secured  account? 

4.  What  are  the  essential  provisions  of  a  personal  guarantee 
of  an  account? 


Form  of  Debt  139 

5.  Explain   the   use   of  notes  in  closing  accounts.     What 
special  conditions  are  sometimes  included  in  such  notes? 

6.  What  is  meant  by  personal  security  on  a  note?     How  is 
it  arranged? 

7.  Explain  collateral  security  on  a  note. 

8.  Explain  the  use  of  mortgages  as  security  on  a  note. 

9.  What  important  factor  sliould  the  collector  consider  in 
extending  time  upon  notes? 


CHAPTER  VI 
rights  of  creditors 

Fundamental  Rights 

A  creditor  has  a  legal  and  moral  right  to  that  which 
is  due  him.  In  good  faith  he  has  transferred  property 
or  credit  or  has  rendered  a  service  to  the  debtor,  and 
accepted  therefor,  in  lieu  of  immediate  payment  in 
property,  cash  or  transfer  of  negotiable  credit,  a  promise, 
either  verbal,  written,  or  implied,  to  pay  at  a  time 
specified,  or,  if  not  specified,  at  a  time  established  by 
custom  in  similar  transactions.  He  has  an  inherent  right 
in  case  of  default  to  demand  payment  and,  failing  to 
realize  within  a  reasonable  time,  he  may  enforce  his  claim 
by  legal  process  against  the  debtor  and  his  assets  or  visi- 
ble resources.  This  right  is  so  ethical,  so  reasonable,  and 
so  generally  understood  that  a  collector,  whether  princi- 
pal or  employee,  should  have  no  feeling  of  hesitancy  or 
apology  in  pressing  his  demands. 

On  the  other  hand,  the  debtor  should  be  led  to  under- 
stand that  concessions  or  extensions,  if  made,  are  either 
based  on  the  direct  interest  of  the  creditor,  or  are 
extended  as  a  personal  favor  to  the  debtor,  and  should 
be  so  considered  and  acknowledged. 

Modifications 

In  practice,  very  few  creditors  or  collectors  exact  the 
''pound  of  flesh."    Instead  of  demanding  payment,  they 

140 


Rights  of  Creditors  141 

politely  invite  attention  and,  where  additional  time  is 
asked,  they  give  careful  consideration  to  the  debtor's 
explanation  as  to  the  cause  of  the  defalcation  and  his 
propositions  for  advancing  the  maturity.  If,  as  some- 
times happens,  the  creditor  is  in  severe  straits  himself 
so  that  he  cannot  without  serious  loss  of  resource  or 
credit  agree  to  an  extension,  the  collection  must  be  forced 
regardless  of  its  effect  on  the  debtor  and  his  business, 
but  short  of  such  necessity  such  action  is  rare.  Few 
creditors  care  to  appear  in  the  role  of  oppressors,  even 
in  their  own  consciousness,  and  would  not  do  so  lightly. 

Aside  from  this  strictly  humanitarian  reason,  the 
relation  of  debtor  and  creditor  is  so  involved  with  future 
transactions  between  the  same  parties  and  between  either 
of  them  and  others  that  it  is  often  profitable  for  both  to 
find  a  basis  offering  greater  convenience  to  the  debtor 
with  no  serious  hardship  to  the  creditor.  Indeed,  such 
readjustments  have  become  so  frequent  and  are  based 
on  such  flimsy  pretexts  that  credit  has  become  cheapened 
to  such  an  extent  that  the  slovenly  debtor  has  become 
prone  to  distort  his  privilege  to  ask  for  indulgence,  to  a 
right  to  demand  whatever  concession  may  suit  his  con- 
venience, overlooking  the  fact  that  persistence  in  such 
methods  may  result  in  a  withdrawal  of  credit  not  only  in 
that  quarter  but  also  by  others  as  well.  The  creditor 
encouraging,  even  tacitly,  such  views  in  his  debtor  is 
a  contributor  towards  developing  demoralization,  the 
reaction  from  which  is  felt  by  the  entire  business 
community. 

The  correct,  the  popular,  the  practical,  as  well  as  the 
ethical  attitude  for  the  creditor  to  assume  is,  first  to 
expect  and  then,  if  need  be,  demand  his  specific  rights. 
Afterwards  he  may,  if  he  sees  fit  to  do  so,  exert  his 
further  right  to  modify  his  demands,  in  order  to  soften  a 


142  Collections 

hardship  brought  about  by  ignorance  of  the  debtor,  or  by 
miscalculation,  or  by  change  of  conditions;  basing  such 
action  on  friendship,  philanthropy,  or  on  expediency  in 
the  interest  of  his  own  affairs  or  reputation.  He  should 
never  himself  lose  sight  of  his  inherent  right  in  the 
premise  nor  should  he  permit  the  debtor  to  do  so,  because 
stability  of  credit  rests  on  recognition  of  the  right  of  the 
creditor  to  expect  promptness  and  to  dictate  after 
maturity. 

Furthermore,  the  debtor  who  from  bad  judgment,  care- 
lessness, or  ignorance  habitually  contracts  obligations  he 
cannot  retire  promptly  at  maturity  is  a  business 
demoralizer,  a  contributor  to  defalcations  of  others,  and, 
if  he  cannot  be  educated  to  better  methods,  should  be 
forced  to  confine  his  operations  to  a  cash  basis.  The  best, 
probably  the  only  way  he  can  be  brought  to  a  more 
businesslike  and  equitable  basis  is  by  his  creditors' 
forcing  him  to  promptness  or  withdrawing  entirely  the 
privilege  of  further  credit.  Such  restrictions  do  not 
curtail  the  ultimate  volume  of  business  but  simply  confine 
it  to  better  and  more  profitable  channels ;  neither  do  they 
entail  undue  hardship  on  the  unworthy,  who  not  only  is  a 
demoralizer,  but  also  would  himself  be  better  off  in  lines 
where  he  is  not  so  palpably  a  misfit. 

TEST  QUESTIONS 

1.  What  are  the  fundamental  rights  of  a  creditor? 

2.  On  what  conditions  should  extensions  be  made? 

3.  What  matters  should  be  considered  in  making  modifica- 
tions in  outstanding  accounts? 

4.  At  what  point  can  the  collector  afford  to  be  liberal  in 
dealing  with  delinquent  accounts? 

5.  How  does  the  creditor  by  insisting  upon  his  rights  render 
a  real  service  to  business? 


CHAPTER  VII 

ENVIRONMENT 

When,  in  making  a  collection,  more  than  first  or  pre- 
liminaiy  steps  are  necessary  to  enforce  the  payment, 
it  is  profitable  for  the  collector  to  make  a  close  investiga- 
tion and  study  of  the  debtor's  emdronment,  or,  stated 
more  specifically,  of  the  situation  with  regard  to  the 
source  from  which  he  must  secure  funds  with  which  to 
pay.    Indeed,  had  this  feature  been  given  due  considera- 
tion  by   either  party   at  the   time   the   obligation   was 
contracted,  it  is  probable  that  the  terms  would  have  been 
adjusted  so  as  to  avoid  defalcation ;  or,  if  this  had  been 
impracticable,  the  credit  would  have  been  deferred  or 
even  declined.     The  wise  user  of  credit  looks  forward 
as   he   contracts   an   obligation   and   takes   into   careful 
consideration  the  source  from  which  he  can  reasonably 
expect  to  realize  funds  not  only  for  the  payment  of  the 
particular  debt  that  he  is  contracting  for,  but  also  for 
the  payment  of  other  obligations  already  incurred,  or  to 
be  incurred  in  the  interim,  making  due  allowance  for 
unforeseen   contingencies   and   the   general   fluctuations 
incident  to  his  line  of  operation.     The  credit  grantor 
should  also  be  advised  regarding  these  details,  since  by 
observing    such    principles    he    reduces    the    work   and 
expense   of   collection  to   simple   routine.     Besides,   in 
getting  this  information  from  and  before  the  debtor,  he 
incidentally  reminds  him  that  it  is  well,  and  to  his  own 

143 


144  Collections 

interest,  to  look  forward  to  provision  for  payment  before 
obligating  himself. 

Seasons 

In  many  lines  and  in  most  localities  business  activity 
varies  widely  with  the  seasons,  and  even  where  the 
volume  of  transactions  is  practically  uniform  throughout 
the  year  or  from  year  to  year,  there  is  considerable 
fluctuation  in  cash  transactions  and  in  collection  against 
credit  items.  By  a  study  of  the  underljdng  elements  of 
production  in  the  debtor's  neighborhood,  the  collector 
can  judge  whether  there  is  normal  cause  for  the  delin- 
quency. In  an  agricultural  community  engaged  largely 
in  truck  farming  or  the  production  of  small  fruits,  money 
should  be  flowing  freely  during  the  spring  and  early 
summer  months.  Where  wheat  and  other  small  grains 
predominate,  late  summer  and  early  fall  should  be  easy; 
corn  if  sold  or  fed  to  hogs,  late  fall  and  early  winter, 
and  if  fed  to  cattle,  late  winter  and  early  spring;  cotton, 
fall  and  winter. 

Manufacturing  in  many  lines  as  well  as  employment 
for  mechanics  and  laborers  also  fluctuates  with  the 
seasons.  The  collector  should  inform  himself  with 
regard  to  the  production  source  from  which  the  debtor 
derives  his  income  so  that  he  may  avail  himself  of  the 
most  favorable  opportunity  for  results.  If  he  finds  the 
debtor  heavily  involved  in  several  quarters,  he  will  do 
well  to  begin  pressure  early  rather  than  late  in  the  season 
of  liquid  funds,  otherwise  it  may  develop  that  the  con- 
stant pressure  under  which  other  creditors  have  kept  him 
will  have  exhausted  his  available  funds. 

Financial  Condition 

In  the  last  analj^sis,  collection  rests  and  depends  on 
the  financial  strength  and  resourcefulness  of  the  debtor. 


Environment  145 

This  is  just  as  true  of  the  clerk  or  laborer  earning  a  few 
dollars  a  week  as  of  the  merchant,  the  manufacturer,  the 
propert}^  owner.  Honesty  and  good  intent  alone  cannot 
pay.  Neither  is  it  safe  to  assume  that  the  honest  man 
will  not  contract  an  obligation  when  means  for  payment 
is  nonexistent  or  uncertain.  He  may  be  innocently 
unaware  of  his  inability,  or  conditions  over  which  he  has 
no  control  may  arise  after  the  debt  has  been  contracted. 

In  any  event,  as  a  foundation,  the  collector  should 
inform  himself  with  regard  to  the  financial  affairs  of  the 
debtor.  If  he  finds  funds  in  hand  or  in  the  bank,  his 
problem  is  reduced  to  developing  ways  and  means  to 
induce  the  debtor  to  satisfy  his  claim.  If  funds  are  not 
immediately  available,  he  must  discover  the  resource 
most  easily  convertible,  satisfy  himself  as  to  a  reasonable 
time  for  such  conversion,  and  effect  an  arrangement 
which  will  as  nearly  as  possible  assure  payment  from  the 
earliest  returns.  If  the  debtor  has  no  convertible  assets 
but  depends  on  returns  for  labor  or  service,  the  arrange- 
ment made  must  conform  to  this  condition. 

Whatever  the  condition  may  be,  allowance  must  be 
made  for  expense,  either  business  or  personal,  or  both, 
and  an  agreement  made  for  application  on  the  debt  in 
such  amount  as  the  amount  realized  in  conversion  or  from 
service  exceeds  the  necessary  expense.  Demand  and 
pressure  for  payments  in  excess  of  net  returns  from  oper- 
ation or  liquidation  where  no  other  convertible  assets  are 
available,  will  obviously  result  in  defalcation,  or  in  forced 
liquidation  at  a  loss  to  the  debtor  and  very  possibly  to 
the  creditor  as  well. 

Information  relative  to  the  state  of  the  debtor's 
finances  without  doubt  served  as  a  basis  for  the  credit 
when  it  was  extended,  The  defalcation  indicates  that 
such  information  was  erroneous  or  incomplete  or  that  a 


146  Collections 

change  in  the  basis  has  occurred.  In  either  case,  the 
credit  data  while  serving  as  a  starting  point  have  little 
further  value  to  the  collector  inasmuch  as  they  must  for 
his  purpose  be  reconstructed  to  cover  the  later  situation 
with  which  he  is  confronted. 

The  collector  in  securing  and  analyzing  financial  data 
places  himself  in  a  position  in  which  he  knows  what  can 
be  reasonably  expected,  and  consequently  can  intelligently 
insist  in  case  the  debtor  does  not  willingly  fall  in  line; 
or,  in  the  rare  instances  where  resort  to  legal  action  is 
necessary,  he  can  attack  understandingly  and  with 
reasonable  certainty  of  the  outcome.  Ordinarily,  if  the 
knowledge  of  resources  in  a  case  is  developed  in  sufiQcient 
detail,  the  debtor  will  heartily  endeavor  to  meet  the  views 
of  the  collector  where  they  are  based  on  such  conception 
and  analysis  of  the  situation  as  will  convince  him  of  the 
feasibility  of  the  proposed  plan.  The  analysis  of  the 
situation  by  the  debtor  and  the  collector  together, 
develops  in  the  debtor's  mind  a  clearer  concept  of  his 
affairs  than  would  be  possible  were  he  acting  without 
advice,  and  enables  him  not  only  to  work  out  his  present 
embarrassment  but  also  to  avoid  similar  complications  in 
the  future. 

TEST  QUESTIONS 

1.  What  is  meant  by  "euviroument"  as  related  to  collection 
matters  1 

2.  What  factors  are  to  be  considered  iu  analyzing  environ- 
ment? 

3.  Explain  how  seasonal  variations  in  industi'y  affect  the 
collector's  problem. 

4.  How  do  these  matters  affect  a  manufacturiug  community? 

5.  IIovv  can  a  collector  assist  a  debtor  who  is  iu  strained 
financial  conditions? 


CHAPTER  VIII 

COLLECTING   COMMERCLA.L   ACCOUNTS 

As  probably  over  90  per  cent  of  the  collections  requir- 
ing more  than  initial  routine  attention  grow  out  of  what 
are  known  under  the  broad  term  "commercial  trans- 
actions," the  selling  on  credit  by  manufacturer,  jobber, 
or  retailer,  the  application  of  principles  and  routine  as 
developed  by  experience  and  custom  will  first  be  con- 
sidered in  connection  with  such  accounts.  The  cases 
which  develop  unusual  or  peculiar  features  or  grow  out 
of  transactions  of  materially  different  nature  will  be  left 
for  separate  treatment. 

Wholesale  Accounts 

Accounts  of  merchants  for  purchase  of  commodities 
or  merchandise  for  resale  whether  from  manufacturer, 
jobber,  broker,  or  other  merchant,  are  known  as  ''whole- 
sale accounts."  Such  accounts  are  largely,  if  not 
entirely,  against  customers  located  at  points  some 
distance  from  the  seller's  place  of  business  and  are 
generally  contracted  through  salesmen  or  agents  of  the 
seller  calling  on  the  customer,  or  by  mail  or  telegraphic 
correspondence,  or  by  a  combination  of  these  various 
facilities.  Usually  the  seller  has  no  personal  acquaint- 
ance with  the  customer,  and  even  the  seller's  agent  sees 
him  only  at  infrequent  intervals  and  has  very  little 
opportunity  to  learn  a  great  deal  that  is  essential  in  the 

147 


148  Collections 

intelligent  opening  of  an  account  without  making  special 
investigation  and  inquirj^  for  the  purpose. 

The  credit  is  based  on  ratings  in  publications  issued  by- 
agencies  furnishing  credit  information  for  a  considera- 
tion and  on  reports  from  such  agencies,  supplemented 
in  some  instances  by  information  gathered  through 
inquiry  from  local  banks  or  other  concerns  or  individuals 
acquainted  with  the  customer,  and  sometimes  by  state- 
ments from  the  customer  direct.  Such  information  no 
matter  how  carefully  and  conscientiously  compiled  is  by 
no  means  infallible,  and,  even  if  it  were,  unforeseen 
changes  might  occur  before  the  credit  matures.  Besides 
these  elements  of  uncertainty  the  reason  for  credit  itself, 
viz.,  the  allowing  for  opportunity  to  make  certain  business 
turns  before  payment  must  be  made,  will  at  times  result 
in  disappointment.  Where  business  is  done  under  such 
conditions  and  credit  is  granted  on  such  basis,  some 
delinquencies  are  unavoidable. 

It  is  the  general  custom  to  extend  credit  privileges 
wherever  ultimate  pajTuent  is  considered  practically 
assured,  and  without  much,  if  any,  regard  to  probabilities 
of  promptness ;  hence  the  necessity  for  special  collection 
facilities  and  activity. 

Classipioation  of  Accounts 

Regardless  of  the  degree  of  care  and  judgment 
exercised  in  checking  credits,  accounts  may  very  logically 
be  grouped  in  four  classes;  viz.,  (1)  discount  accounts, 
(2)  prompt-pai/ment  accounts,  (3)  difficult  accounts,  that 
is,  slow  hut  good  accounts,  and  (4)  had  accounts. 

Discount  Accounts 

Terms  in  commercial  practice  are  usually  stated  as  a 
specific  number  of  days  or  months,  net  or  subject  to  a 


Commercial  Accounts  149 

stated  per  cent  of  disconnt  for  cash  if  paid  within  a 
stipulated  shorter  period.  The  rate  of  discount  when 
reduced  to  terms  of  annual  interest  for  the  period  of 
time  intervening  between  the  discount  date  and  the  net 
maturity  date  generally  affords  a  premium  over  usual 
interest  rates;  e.  g.,  terms  30-2-10,  or,  stated  in  full,  30 
days  net,  subject  to  discount  of  2  per  cent  if  paid  in  ten 
days.  The  difference  between  the  discount  date  and  the 
net  maturity  date  is  20  days — 2  per  cent  for  20  days 
equals  1  per  cent  for  10  days  or  3  per  cent  a  month  or  36 
per  cent  per  annum. 

Likewise,  terms  30-1-10  equal  18  per  cent  per  annum; 
30-1/2-10  equal  9  per  cent  per  annum;  60-2-10  equal 
14%  per  cent  per  annum. 

These  are  very  common  terms  on  staple  articles.  Less 
staple  or  seasonal  goods  frequently  take  longer  or  special 
terms  with  varying  but  generally  profitable  rates  of 
discount. 

In  these  days  of  close  competition,  the  merchant  whose 
business  is  so  inadequately  capitalized  or  poorly  con- 
ducted that  he  at  the  very  least  cannot  save  his  cash  dis- 
counts on  his  staple  commodities,  is  operating  under  a 
serious  handicap  and  will  certainly  be  subject  to 
embarrassment  during  the  inevitable  periods  of  financial 
or  local  depression.  Happily,  as  the  business  of  the 
country  develops  it  centers  more  and  more  in  the  hands 
of  those  best  equipped  financially,  mentally,  and  by  train- 
ing, so  that  the  ranks  of  the  discounters  grow  stronger 
from  year  to  year. 

The  discounter  is  unknown  to  the  collector.  He 
absorbs  through  his  discounts  into  his  own  profits,  not 
only  a  high  rate  for  eliminating  the  time  element  from  his 
purchases,  but  also  the  cost  of  collection  as  well. 


150  Collections 

Pbompt-Payment  Accoun-ts 

Next  in  order  of  desirability  is  the  customer  who  pays 
promptly  at  maturity.  During  periods  of  normal  busi- 
ness and  financial  activity  he,  too,  affords  little  for  the 
attention  of  the  collector.  He  may  require  attention  to 
the  extent  of  a  polite  reminder,  or,  as  he  merges  toward 
the  ranks  of  the  ''slow  pay,"  even  a  draft  or  a  follow-up 
letter  but,  in  the  main,  simple  routine  is  all  that  is 
necessary. 

Wlien,  however,  periods  of  depression  either  general 
or  local  occur,  the  normally  prompt-pay  customer  is 
prone  to  join  the  "slow-pay"  class  and  consequently 
falls  into  the  collector's  hands.  The  treatment  called  for, 
however,  is  identical  with  the  preliminary  steps  in  the 
next,  or  slow-pay,  class  with  the  possible  exception  that 
on  account  of  his  past  good  record  he  should  be  accorded, 
with  somewhat  less  reluctance,  the  moderate  temporary 
concession  he  may  need.  Should  he  require  more  than 
nominal  assistance,  or,  ha\ing  had  one  extension,  should 
he  ask  a  second,  he  should  be  checked  up  carefully  with 
a  view  to  detecting  a  possible  development  of  hazard  in 
the  account  which  may  be  evaded  by  special  handling  in 
the  early  stages  of  attention. 

Difficult  Accounts — Slow  But  Good 

This  is  the  class  of  debtors  around  which  the  entire 
collection  problem  revolves.  Happily,  in  numbers  it  is 
far  outstripped  by  the  ''discounters"  and  "prompt 
pay,"  though  in  the  aggregate  its  number  is  legion.  This 
is  the  class  that  while  meriting  least  consideration 
receives  the  most.  Occasionally,  it  is  true,  a  case  develops 
where  a  good  business  man  with  normal  capital  miscal- 
culates, or  meets  with  a  misfortune,  and  actually  merits 


Commercial  Accounts  151 

assistance  and  leniency  from  his  creditors.  Such  cases, 
however,  when  compared  with  the  multitude  of  delin- 
quents, are  unimportant.  Furthermore,  the  assistance 
required  is  only  moderate  and  temporary. 

The  chronic  slow  pay  we  have  with  us  always.  He  it 
is  who  reports  short  crops,  slack  employment,  and  the 
five  or  six  other  unfavorable  conditions  that  serve  as 
excuses  for  his  delinquency.  He  probably  does  not  know 
that  his  neighbor  in  the  next  block,  serving  exactly  the 
same  class  of  trade  with  the  same  merchandise,  is  dis- 
counting his  bills  or  paying  promptly  at  maturity. 
Prolific  in  excuses  and  explanations  as  he  is,  he  would  be 
at  a  loss,  if  he  could  see  his  statement  of  resources  and 
liabilities  in  parallel  columns  with  that  of  his  neighbor's 
to  explain  why,  with  his  showing  better  in  all  essentials 
than  his  neighbor's,  he  must  beg  or  take  extra  time  while 
the  neighbor  does  not  ask  or  need  any  assistance.  He 
no  doubt  would  become  incensed  should  the  real  answer 
be  suggested — "your  neighbor  is  a  good  business  man 
while  3^ou  fall  far  short  of  the  qualification." 

The  collector  should  understand  these  facts.  He  should 
know  that  practically  all  losses  develop  from  the  ranks  of 
the  slow  pay.  He  should  realize,  or,  if  he  doubts,  he 
should  prove  by  checking  back,  that  the  account  that  has 
been  prompt  and  falls  behind  for  a  tempcjrary  reason 
does  not  run  slow  very  long,  but  recovers,  or,  becoming 
chronic,  develops  some  vital  weakness  likely  to  continue 
to  the  point  of  producing  failure.  He  should  know  that 
chronic  slow  pay  gives  the  lie  to  a  good  financial  state- 
ment no  matter  how  honestly  rendered.  The  chronic 
slow  pay  generally  does  make  a  fair  statement,  and 
frequently  a  good  one.  If  he  did  not,  his  credit  would 
probably  have  been  long  since  withdrawn  and  he  out  of 
business,  possibly  by  the  failure  route. 


152  Collections 

Here  is  where  the  work  of  the  collector  should  supple- 
ment that  of  the  credit  man.  If  an  account  starts  slow 
or  develops  slow,  and  particularly  if  slowness  is  or 
becomes  chronic,  the  collector  should  find  out  why.  If 
the  answer  is  inherent  weakness  or  impaired  vitality, 
further  credit  should  be  refused,  as  continued  credit  is  a 
gamble  pure  and  simple,  a  bet  that  another  account  can 
be  worked  out  before  the  crash  comes.  Of  prior  import- 
ance is  the  collection  of  the  present  account.  The 
collector  fully  advised  of  a  vital  weakness,  its  cause,  and 
what  is  left  from  which  to  realize,  can  lay  his  plans 
intelligently  and  make  progress  towards  realization  and 
save  an  account  which  would  otherwise  result  in  a  loss. 

The  Bad  Account 

The  bad  account,  barring  an  occasional  exception, 
develops  from  the  slow-pay  account.  The  first  suggestion 
that  the  account  is  bad  is  delinquency.  Suspicion  is 
driven  towards  certainty  by  continued  delinquency.  Even 
the  final  proof  of  worthlessness  is  delinquency  continued 
until  all  resource  from  which  payment  may  be  expected 
has  been  exhausted.  Salvage  from  bad  accounts  depends 
on  early  recognition  of  the  facts  followed  by  intelligent 
methods  of  liquidation. 
t 

TEST  QUESTIONS 

1.  What  is  meant  by  wholesale  accounts? 

2.  Would  the  account  of  a  newspaper  publisher  with  a  news 
stand  be  considered  a  wholesale  account? 

3.  What  are  some  of  the  characteristics  of  wholesale  ac- 
counts that  have  an  important  bearing  on  collection  problems? 

4.  What  are  the  four  classes  of  accounts  recognized  by  col- 
lection men? 


Commercial  Accounts  153 

5.  Explain  what  is  meant  by  discounts.    How  are  such  ac- 
counts related  to  tKe  work  of  a  collector? 

6.  In  what  manner  do  prompt-payment  accounts  differ  from 
discount  accounts  from  the  collector's  standpoint? 

7.  What  are  some  of  the  characteristics  of  the  chronic  slow- 
pay  debtor  ? 

8.  Describe  the  bad  account  as  a  collector  sees  the  problem. 


CHAPTER  IX  >\ 

COLLECTING    SLOW   ACCOUNTS 

Any  account  running  past  maturity  merits  the  col- 
lector's attention.  Preliminary  action  though  simple  and 
entirely  routine  should  be  prompt.  The  expectant  or 
restless  state  of  mind  incident  to  the  maturity,  should  be 
considered  and  stimulated  by  promptly  calling  the 
debtor's  attention  to  his  delinquency  the  moment  it 
becomes  apparent.  The  debtor  may  have  other  maturities 
falling  due  at  the  same  time  and  be  ready  to  pay  a  part, 
but  not  all,  of  these  maturities.  In  such  case  he  is  apt  to 
accept  the  first  invitation  and,  indeed,  may  be  waiting  to 
determine  the  quarter  in  which  his  delinquency  will 
attract  least  attention,  as  indicated  by  the  creditor 's  own 
neglect  with  deliberate  intention  of  letting  that  account 
run.  Comparison  of  the  experiences  of  many  creditors 
with  the  same  slow-pay  customer  shows  that  almost 
invariably  one  or  a  few  have  found  the  account  prompt 
and  satisfactory,  while,  "with  all  the  others,  slowness  to 
a  widely  variant  degree  has  been  continuous ;  this,  regard- 
less of  the  size  of  the  account  or  the  nature  of  the 
commodity.  The  debtor  has  actually,  though  probably 
unconsciously,  adjusted  his  payments  according  to  the 
insistency  and  persistency  of  the  collector's  methods 
without  regard  to  the  relative  delinquency  of  the 
accounts. 

154 


Slow  Accounts  155 


Initial  Procedure 


Reminder  before  maturity;  indirect  demand  after 
maturity. 

With  mercantile  establishments  extending  credit 
through  open  accounts,  the  practice  of  mailing  to  each 
debtor  a  regular  statement  at  the  close  of  each  month 
so  long  as  unpaid  items  due  or  not  due  remain,  has 
become  general,  in  fact,  almost  universal.  Such  state- 
ments vary  in  form  or  matter  to  some  extent,  but  all 
embody  the  essential  features:  date  of  issue,  name  and 
address  of  debtor,  name  and  address  of  creditor,  dates 
and  amounts  of  items,  and  terms.  Reaching  a  debtor 
before  maturity  of  any  of  the  items,  they  serve  to  remind 
him  of  the  account  and  to  give  him  a  chance  to  check 
with  regard  to  correctness  and  to  prepare  for  payment  at 
maturity  if  special  preparation  is  necessary. 

Before  maturity  of  items,  statements  are  not  intended 
as  duns  and  are  seldom  so  construed.  After  maturity, 
they  serve  as  an  indirect  demand  for  payment.  The  force 
of  the  demand  may  be  augmented  by  a  printed  notice  on 
the  statement  form  requesting  payment  of  matured  items 
or  advising  that  draft  will  be  drawn  for  items  not  paid 
at  maturity.  Where  such  printed  notice  is  not  embodied 
in  the  statement  form,  it  is  customary  to  use  a  rubber 
stamp  on  the  face  of  the  statement,  giving  notice  of  date 
and  amount  of  draft  to  be  made  in  case  payment  is  not 
made  prior  to  such  date. 

Record  and  Tickler  for  Follow-Up 

Where  the  number  of  accounts  is  small,  the  practice  of 
following  direct  from  the  ledger  is  very  general.  This 
practice  results,  however,  almost  invariably  in  haphazard 
handling  at  irregular  intervals  and  in  periodical  neglect. 


156  Collections 

Collection  routine  is  made  secondary  to  other  duties  of 
the  individual  responsible  therefor.  This  neglect  occurs 
usually  when  business  is  active,  and  unless  returns  from 
collections  keep  pace  with  the  turnover,  unnecessary 
capital  must  be  employed.  Then,  too,  neglected  collec- 
tions become  hard  collections,  and  customers  fall  into  bad 
habits  which  affect  future  business.  For  these  reasons 
it  is  desirable  and  profitable  that  a  tickler  system  supple- 
mental to  the  ledger,  and  covering  matured  accounts 
only,  be  employed  and  that  such  system  be  followed  as 
regularly  with  few  accounts  as  with  many. 

It  is  desirable,  of  course,  to  avoid  duplication  of 
records  and  also  to  reduce  rather  than  increase  the 
volume  of  clerical  routine.  The  tickler  system,  however, 
can  be  simplified  so  that  it  will  require  all  told  less  labor 
and  time  than  would  be  consumed  in  scanning  accounts 
not  due,  in  following  direct  from  the  ledger,  and  con- 
sequently requiring  no  collection  attention.  Collection 
managers  in  many  highly  systemized  offices  make  up 
cards  on  each  delinquent  account,  entering  thereon  details 
of  amounts,  maturities,  etc.,  and  either  check  these 
regularly  against  ledgers  or  enter  payments  thereon  from 
daily  cash  record.  This  system  entails  considerable 
clerical  labor  and  serves  no  good  end  so  far  as  following 
collections  is  concerned  that  cannot  be  secured  in  a  more 
simple  and  less  laborious  manner. 

The  writer  recommends  as  follows :  In  writing 
monthly  statements  use  carbon  sheets,  making  statements 
in  duplicate.  Mail  the  original  to  the  debtor  and  retain 
the  carbon  copy  for  collector's  use.  Separate  the  carbon 
copies  into  lots  according  to  maturities.  In  the  first  lot, 
place  only  tliose  that  contain  items  that  mature  during 
the  current  month.  In  the  second  lot,  place  those  that 
contain  items  that  matured  prior  to  the  current  month. 


Slow  Accounts  157 

In  the  third  and  last  lot,  discard  all  statements  which 
contain  only  items  maturing  later  than  the  current  month. 

Distribute  lot  one  into  a  daily  tickler  box  or  file  so  that 
carbon  statements  may  come  out  at  such  time  as  the  first 
maturing*  item  thereon  may  require  attention.  This 
should  usually  be  three  to  five  days  later  than  the  first 
maturity,  the  intent  being  to  allow  sufficient  time  for 
receipt  of  remittance  if  mailed  on  the  day  of  the  maturity 
or  on  the  first  succeeding  day.  Premature  action  may 
incense  the  debtor,  but,  on  the  other  hand,  it  is  desirable 
to  preserve  the  psychological  advantage  existing  at  the 
time  of  maturity. 

The  second  lot  of  carbon  statements  containing  items 
that  have  matured  prior  to  the  current  month  (past 
dues),  as  well  as  possible  subsequent  items,  should  be 
attached  to  the  current  correspondence  file  pertaining  to 
each.  These  files  should  be  kept  in  numerical  rotation 
as  per  ledger  folios  as  shown  on  carbon  statements,  or 
alphabetically. 

The  collection  files  as  worked  out  by  payments  should 
be  transferred  to  the  permanent  files  of  the  office  in  order 
to  keep  in  current  files  unfinished  items  only.  If  the 
number  of  such  unfinished  file  budgets  is  small,  no  special 
tickler  is  necessary,  as  it  will  require  only  a  little  time 
three  or  four  times  a  month  to  handle  them  all  over  and 
to  give  consideration  to  such  as  may  require  attention. 
If  the  number  of  accounts  in  correspondence  is  large,  a 
tickler  will  be  found  to  be  a  labor-saver  and  at  the  same 
time  will  more  logically  distribute  for  current  attention, 
since  it  brings  out  each  day  only  the  names  that  are  due 
for  further  action. 

For  a  tickler  take  small  sheets  or  slips  of  paper  and 
fasten  together  at  upper  end  by  one  metal  fastener. 
Beginning  with  the  top  sheet,  stamp  or  write  at  the 


158  Collections 

bottom  of  each  sheet  dates  of  successive  business  days, 
dating  forward  say  thirty  days.  As  letters  are  written 
(or  signed),  or  other  action  taken,  estimate  a  logical  time 
by  which  returns  should  be  in  or  further  action  taken, 
then  turn  to  the  tickler  sheet  bearing  that  date  and  enter 
the  folio  number  of  the  account  under  consideration;  or, 
if  current  files  are  kept  in  alphabetical  rotation,  write  in 
addition  to  the  folio  number,  the  name  in  abbreviated 
form  on  the  tickler  sheet.  By  use  of  this  simple  tickler, 
which  requires  practically  no  clerical  labor,  a  stenog- 
rapher or  even  the  office  boy  can  place  before  the  collector 
all  budgets  due  for  attention  and  the  time  of  no  one  need 
be  wasted  in  handling  or  looking  over  cases  set  for  later 
dates.    See  Figure  5. 

Correspondence  Files 

The  foundation  of  a  correspondence  file  is  the  first 
carbpn  statement  issuing  after  an  account  or  item 
matures.  The  file  should  be  built  from  the  bottom  up, 
with  the  exception  that  the  statement  should  be  kept  on 
the  top  for  convenience  in  checking.  This  enables  the 
correspondent  in  dictating  to  glance  at  the  last  letter  and 
build  up  pressure  logically. 

Daily  Collection  Routine 

Each  day  take  from  the  tickler  box  carbon  statements 
filed  for  attention  on  that  date.  Also,  bring  from 
unfinished  correspondence  files  budgets  as  per  corre- 
spondence tickler  sheet  for  that  day.  Check  statements 
by  the  ledger,  cash  receipts  for  the  day  having  been 
posted.  Destroy  statements  of  the  current  month  if  paid 
in  full,  or  replace  in  the  tickler  box  at  proper  date  for 
next  maturity  if  other  items  mature  later  that  month. 


Slow  Accounts 


159 


CORRESPONDENCE  TICKLER 


Ledgers 


AD 


E-K> 


L-R 


SZ 


Jan.   23 


Fig.  5. — Correspondence  Tickler 

The  entries  on  this  sheet  mean  that  accounts  26,  135,  and  248  in  ledger 

A  to  D  require  attention  on  Jan.  23. 

Accounts    in   other   ledgers   would   be   shown   in   proper   column.     These 

entries  were  made  at  time  of  last  previous  handling. 


160  Collections 

Transfer  to  "finished"  file  the  correspondence  on  past 
dues  paid  since  previous  checking. 

Sight  Drafts 

Notice  of  maturity  through  statement  with  advice  of 
draft,  either  in  general  or  in  specific  terms,  printed, 
stamped,  or  written  on  statement,  having  failed  to  in- 
duce payment,  next  in  order  comes  the  draft  at  sight 
or  on  demand.  A  draft  as  used  in  collections,  is  a  written 
order  by  the  creditor  on  the  debtor  to  pay  to  a  third  party 
(generally  a  bank)  the  amount  specified.  This  method  of 
collecting  makes  a  bank  the  collector  of  the  account.  The 
formality,  publicity,  and  significance  incident  to  such 
presentation  often  make  it  very  effective.  This  advan- 
tag'e  is  somewhat  offset  by  the  fact  that  banks  make  no 
strenuous  efforts  to  collect  such  drafts.  They  may  write 
to  the  debtor  asking  him  to  call  with  regard  to  the  draft 
or  present  it  through  a  messenger.  If  it  is  not  paid 
within  a  few  days,  the  bank  returns  it  with  such  brief 
notations  as  '*No  reply,"  "Refused,"  or  "Not  found." 
A  specimen  sight  draft  is  presented  in  Figure  6. 

Drafts  are  usually  payable  at  sight  or  on  presentation 
by  the  party  in  whose  favor  they  are  drawn,  but  they  may 
be  drawn  payable  a  specific  number  of  days  after  pre- 
sentation, in  which  case  they  are  called  "time  drafts." 
The  time  draft  is  seldom  used  in  connection  with  the 
collection  of  past-due  accounts.  When  so  used  it  is 
presented  promptly  for  acceptance,  with  the  acceptance 
and  maturity  written  across  the  face  to  be  signed  by  the 
drawee.  If  the  time  to  run  is  only  a  few  days,  it  is 
customary  for  the  bank  to  hold  for  payment,  otherwise 
it  is  returned  to  the  drawer  who  will  henceforth  treat  it 
as  a  note.    An  accepted  draft  has  the  same  standing  and 


Slow  Accounts 


161 


^^ 


ft 

bC 

.1-1 

< 
1. 

2 


ISSlOtid   ON 


162  Collections 


TREASUnV     DEPARTMENT 

Harmony  &,  Company 

XOS    SOUTH  LA  SALLE  STREET 


CHICAGO,  ILL 19L 


GENTLEMEN:- 

Enclosed  we  hand  you  for  collection  and  returns  our 

Draft  I 

Note  )      ^"  

of 


in  amount 


With  Ejcchao^c  and  Collection  Charges 


Yours  truly 

Account  No 

J.B  THOMAS 

Treasurer 


iOOQ^O  009  f>ooocoooeoceoooeececoe»ooot>oo9ooo  00  000  oooovooocooooooQooeoooooooo  0  000  00  0900 

Account  No. 


PLEASE  DETACH 

AND  RETURN  WITH  REMITTANCE  TO 

HARMONY   &  COMPANY 

70S  SOUTH  LA  SALLE  STRCCT 

CHICAGO.  ILL. 


Fig.  7. — Advice  Form  Used  in  Connection  with  Drafts 


Slow  Accounts  163 

use  as  a  note  of  hand  and  is  subject  to  the  same  treatment 
in  its  use  and  collection. 

Drafts  on  customers  in  other  towns  may  be  deposited 
for  collection  with  the  drawer's  own  bank  or  may  be 
sent  for  collection  and  returns  to  a  bank  in  the  customer's 
vicinity.  In  either  case  a  record  for  follow-up  is  neces- 
sary, because  the  mailing  of  a  draft  does  not  relieve  the 
collection  department  of  any  responsibility  in  the  account. 
A  memo  of  the  date  and  the  amount  of  draft  on  the 
carbon  statement  put  forward  in  the  tickler  box,  and  a 
carbon  copy  of  the  letter  of  advice,  if  sent  direct,  or  of 
the  deposit  sheet,  if  deposited,  is  sufficient.  Figure  7 
shows  an  advice  form  that  may  be  used  in  sending  drafts 
for  collection. 

Exceptions  to  the  Use  op  Drafts 

Drafts  should  not  be  drawn  on  railroad  or  other 
corporations  known  to  pay  by  voucher  nor  on  customers 
who  have  specified  a  preference  for  demand  in  other 
form.  Such  accounts  should  pass  immediately  from 
defaulted  statement  into  correspondence. 

Where  a  small  item  in  an  account  is  due  for  a  draft 
and  a  larger  item  will  mature  within  a  few  days,  it  is 
better  to  defer  the  draft  until  the  larger  item  matures 
and  then  to  combine  both  items  in  one  draft. 

Collection  Correspondence — First  Steps 

When  drafts  are  returned  by  a  bank  or  when  not 
returned  promptly,  and  when  carbon  statements  from  the 
tickler  upon  being  rechecked  still  show  items  unpaid,  the 
collector's  work  has  passed  from  routine  to  the  beginning 
of  special  attention  through  correspondence. 

First  letters,  however,  need  be  little  more  than  polite 
reminders.    If  the  draft  has  been  returned,  that  fact,  and 


164  Collections 

reason  if  stated  by  the  bank,  should  be  commented  on 
and  the  expectation  of  a  prompt  remittance  expressed. 
If  the  draft  has  not  been  returned,  the  debtor  should  be 
requested  to  call  at  the  bank  and  pay  or,  if  more  con- 
venient, to  remit  direct.  At  the  same  time  a  letter  should 
be  written  to  the  bank  requesting  it  to  present  the  draft 
again  and,  if  not  paid,  return,  giving  reasons  for  non- 
payment. The  carbon  statement  should  be  attached  to 
the  file  copies  of  these  first  letters  and  an  entry  for  future 
following  should  be  made  on  the  correspondence  tickler 
sheet. 

Up  to  this  point  the  treatment  may  well  be  along 
general  lines,  some  consideration,  of  course,  being  given 
to  the  comparative  size  of  items  involved  or  to  other 
features  apparent  within  the  account  itself.  From  this 
stage  the  correspondence  should  be  individualized  and 
fitted  to  a  plan  carefully  evolved  from  a  study  of  the 
debtor's  present  financial  condition  and  environment. 

General  Principles 

A  few  general  rules  and  principles  apply  to  all  the 
correspondence  and  should  never  be  overlooked.  Polite- 
ness is  essential.  Start  mildly,  gradually  work  from 
request  to  insistence  and  then  to  demand,  but  always  in 
language  which  will  give  the  most  sensitive  no  ground 
for  offense. 

Explicitness  is  very  important.  State  definitely  the 
date,  the  amount,  and  the  maturity,  not  only  in  the  first 
letter,  but  throughout  the  correspondence,  and  let  the 
reference  to  overdue  time  be  cumulatively  conspicuous. 
Let  there  be  no  indication  of  uncertainty.  If  at  any  time 
apologetic  language  be  employed,  let  it  be  for  the 
necessity  of  the  demand,  not  for  the  demand  itself. 


Slow  Accounts  165 

Collector's  Attitude 

In  requesting,  demanding,  or  enforcing  action  on  an 
account,  the  collector  should  assume  an  impersonal 
attitude,  that  of  an  instrument  driven  by  the  necessity 
of  the  situation.  In  extending  favors,  he  should  resume 
the  personal  attitude,  granting  favors  from  those  in 
authority  (real  or  assumed),  or  from  the  standpoint  of 
personal  intercession  with  those  in  authority. 

TEST  QUESTIONS 

1.  Explain  why  promptness  and  timeliness  in  presenting  a 
statement  to  a  slow-pay  customer  are  important  from  the  col- 
lector's standpoint. 

2.  What  is  the  nature  of  statements  mailed  to  debtors  at 
regular  i>eriodic  times? 

3.  What  notice  is  often  attached  in  regard  to  the  use  of 
drafts? 

4.  When  may  slow-pay  accounts  be  followed  up  directly 
from  the  ledger  ?  Wliat  are  the  chief  objections  to  such  a  method 
of  handling  accounts? 

5.  Explain  the  use  of  a  tickler  for  follow-up  work  on  delin- 
quent accounts. 

6.  Explain  the  daily  collection  routine  in  handling  accounts. 

7.  Explain  the  use  of  sight  drafts  in  collection  work. 

8.  Wliat  are  the  advantages  and  the  limitations  in  the  use 
of  sight  drafts  ? 

9.  In  what  eases  should  sight  drafts  not  be  used  ? 

10.  At  what  point  does  it  become  necessary  to  individualize 
delinquent  accounts? 

11.  What  is  meant  by  the  statement,  "Let  the  reference  to 
overdue  time  be  cumulatively  conspicuous"? 


CHAPTER  X 

ACTUAL    PROCEDURE    AND    PRACTICE 

Examples  should  serve  only  as  illustrations  for  the 
application  of  principles.  They  are  to  be  taken  as  guides, 
not  as  models,  for  every  case.  With  this  thought  in  \dew, 
the  following  procedure  is  given.  Much  discussion  has 
been  omitted  because  the  reader  of  this  treatise  and  the 
practical  collector  will  have  no  trouble  in  understanding 
each  step. 

Statement 

The  first  step  in  the  procedure  consists  in  mailing  the 
regular  monthly  statement  shown  in  Figure  8.  The  pur- 
pose and  nature  of  this  statement  have  already  been  ex- 
plained. 

A  carbon  copy  of  this  statement  dated  Nov.  30  was 
placed  in  the  tickler  box  to  come  out  Dec.  17,  five  days 
after  maturity  of  the  first  item. 

Deaft 

The  carbon  statement  was  checked  Dec.  17  and  found 
unpaid.  The  original  statement,  mailed  Nov.  30,  con- 
tained notice  that  draft  would  be  drawn  Dec.  17  for 
$127.43.  Draft  was  drawn  accordingly  and  sent  to  the 
First  National  Bank  of  Hartwell,  Mo.,  for  collection. 
Draft  was  returned  indorsed  ''Cannot  pay  now." 

166 


Procedure  and  Practice 


167 


STATEMeNT 

i  That  part  of  oar  account  against  you  whicfi  Is  covered  j 
I  by  notes,  (if  any)  is  not  included  In  this  statement  j 

Nov.   30, 


Chicago,  III.,. 
HARMONY     Sl     COMPANY 


In  account  with 


208    SOUTH    LA    SALLE    STREET 


19lJ 


Jas.   Oooper  &  Co. . 


Hartvell,  Mo. 


BILLS    NOT    PAID    AT    MATURITY    SUBJECT 
TO    DRAFT   WITHOUT    FURTHER    NOTICE. 


Oct. 


12 


60-2-10 


2b 


JJC 


Nov. 


10 


-a_ 


Fig.  8. — Form  of  a  Monthly  Statement 


168  Collections 

Subsequent  Coekespondence 

fikst  lettee 

Chicago,  lU.,  Dec.  24,  1914 

James  Cooper  &  Co., 
Eariwell,  Mo. 

Gentlemen  : 

On  Dec.  17  in  accordance  with  previous  notice,  we  made  draft 
on  you  through  the  First  National  Bank  of  your  city  for  $127.43, 
the  amount  of  invoice  of  Oct.  12,  now  some  twelve  days  overdue. 
Bank  has  returned  draft  indorsed  "Cannot  pay  now." 

Trusting  this  report  is  in  error  and  inviting  your  kind  atten- 
tion, we  are 

Yours  truly, 

Haemony  &  Company 

Entered  on  tickler  sheet  dated  Jan.  8,  1915. 

In  the  meantime  invoice  of  Dec.  5  for  $175.73  has  been 
entered  in  the  account. 

Statement  mailed  Dec.  31,  1914,  stamped  ''Past  Due." 
Out  Jan.  8,  checked,  still  unpaid. 

SECOND  LETTEE 

Chicago,  ni,  Jan.  8,  1915 
James  Cooper  &  Co., 
HartwcU,  Mo. 

Gentlemen  : 

On  Dec.  24,  we  wrote  you  inviting  your  polite  attention  to 
your  invoice  of  Oct.  12,  $127.43,  now  nearly  30  days  past  due. 
Today  we  find  the  item  still  unpaid,  and  notice  that  in  the  mean- 
time another  bill,  viz.,  Oct.  26,  $324.47,  has  matured.  Total  past 
due,  $451.87. 


Procedure  and  Practice  169 

Permit  us  to  expect  remittance  to  cover  these  two  items  by 
return  mail,  and  greatly  oblige. 

Yours  truly, 

Haemony  &  Company 

Entered  in  tickler  10  days  ahead. 
Out  Jan.  18,  checked,  no  change. 

THIBD  LETTEE 

Chicago,  111.,  Jan.  18,  1915 
James  Cooper  &  Co., 
Hariwell,  Mo. 

Gentlemen  : 

There  stand  in  your  account  today  past-due  items : 

Oct.  12,  due  Dec.  12,  $127.43 

26,  due  Dec.  26,    324.47 

Nov.  10,  due  Jan.  10,    223.59 


Total  past  due. .  .$675.49 

We  drew  draft  on  you  for  the  first-mentioned  item  and  have 
since  written  you  two  letters:  viz.,  Dec.  24  and  Jan.  8. 

We  have  borne  your  inattention  with  patience,  but  must  now 
kindly  insist  on  immediate  payment. 

Yours  truly, 

Harmony  &  Company 
By  J.  Weston 

Treasurer 

As  a  statement  goes  out  Jan.  31  stamped  ''Past  Due" 
and  the  last  item  in  the  account  matures  Feb.  5,  a  tickler 
entry  is  made  for  Feb.  6. 

Out  Feb.  6,  checked,  no  change. 


170  Collections 

FOURTH  LETTER 

Chicago,  111.,  Feb.  6,  1915 
James  Cooper  &  Co., 
Hartwell,  Mo. 

Gentlemen  : 

In  checking  our  accounts  today  we  are  much  surprised  to 
find  yours  still  unpaid.  The  oldest  item  is  now  almost  60  days 
past  due  and  other  items  which  have  matured  since  bring  the 
total  up  to  $851.22. 

We  have  written  numerous  letters  to  none  of  which  you  have 
accorded  us  the  courtesy  of  a  reply.  We  can  imagine  reasons 
that  might  account  for  non-payment  but  can  conceive  of  nothing 
to  account  for  not  hearing  from  you. 

In  any  event,  we  have  now  reached  a  point  where  we  must 
kindly  insist  on  payment  without  further  delay. 

Yours  truly, 

Harmony  &  Company 
By :  J.  Weston 

Treasurer 
Entered  in  tickler  for  Feb.  16. 
Out  16,  checked,  no  change,  no  response. 
Sent  telegram  (Fig.  9)  Feb.  16. 
Enter  tickler  for  Feb.  21. 
Out  21,  still  unpaid,  no  response. 

Treatment  up  to  the  telegram  lias  been  based  on  the 
assumption  that  the  credit  of  this  firm  is  good  and  that  no 
special  hazard  was  in  evidence  when  the  business  was 
accepted.  The  failure  to  answer  letters  might  have  been 
the  result  of  carelessness,  the  dislike  for  making  an 
excuse  where  payment  is  expected,  or  for  various  other 
reasons.  But  failure  to  respond  to  the  telegram  suggests 
something  vitally  wrong.  The  effect  of  the  telegram  is 
not  in  the  demand,  but  in  its  psychological  effect.  It 
suggests  urgency  or  the  exhaustion  of  patience.    It  gen- 


Procedure  and  Practice  171 

erally  results  in  payment  if  payment  is  possible;  if 
momentarily  impossible,  in  explanations  and  promises 
for  early  attention. 

The  telegram  should  be  used  only  when  letters  are 
ignored  or  when  definite  promises  have  been  repeatedly 
broken.  Under  such  conditions  no  offense  can  be  taken. 
If  the  debtor  complains  of  such  usage,  he  should  be 


WESTEI 

P  UNION 

""" 

THEO.  N.  VAIL.  PRESIDENT 

SEND  tbe  toOtmliil  Tilelmn,  labieet  lo  th«  Krau 
oo  bwk  bcrcof,  which  are  faerthy  agreed  to 

Chioago,   111.,  Feb.   16, 

1915 

James  Coopor  &  Co., 
Rartwell,   Mo. 

Uust  Insist  Iminedlste  payment  past  due  aooount.     Answer. 

HARMONY  k  COMPANY 

COLLECT 

Fig.  9. — A  Collection  Telegram 

answered  by  a  reminder  that  he  had  paid  no  attention 
to  letters,  and  that  a  telegram  had  been  sent  in  prefer- 
ence to  giving  his  account  to  an  attorney,  which  was  the 
only  logical  alternative.  Proper  precaution  should  be 
exercised  in  all  correspondence  whether  by  letter  or  tele- 
gram to  avoid  committing  the  legal  offenses  of  blackmail 
or  libel. 

This  stage  having  been  reached,  it  is  in  order  to  make 
a  new  and  careful  investigation  as  to  the  customer's 
condition,  if  indeed  such  action  has  not  already  been 
taken. 


172  Collections 

If  a  salesman  is  in  the  vicinity,  he  should  be  advised 
and  requested  to  collect  or  report.  Inquiiy  as  to  the 
debtor's  treatment  of  other  creditors  should  be  made. 
While  this  is  being  done,  the  persistency  of  the  collec- 
tion department  should  continue  in  a  letter  somewhat 
as  follows: 

FIFTH   LETTER 

Chicago,  111.,  Feb.  21, 1915 
James  Cooper  &  Co., 
Hartwell,  Mo. 

Gentlemen  : 

Not  having  had  a  response  to  any  of  our  numerous  letters 
relative  to  your  long  overdue  account  for  $851.22,  we  wired  you 
on  Feb.  16  as  follows:  "Must  insist  immediate  payment  past- 
due  account.    Answer." 

You  have  ignored  the  telegram  as  well  as  the  letters.  We 
believe  you  will  agree  that  we  have  not  only  been  liberal,  but 
that  we  have  more  than  done  our  part,  and  that  we  have  extended 
more  than  due  courtesy. 

Under  these  circumstances  you  must  realize  that  we  cannot 
permit  the  matter  to  rest  in  this  shape  and  that  unless  immediate 
payment  is  made  we  shall  be  compelled  to  hand  your  account  to 
an  attorney  with  instructions  to  protect  our  interests  by  taking 
such  action  as  may  be  necessary  to  secure  payment. 

You  realize,  of  course,  that  a  report  of  such  action  would 
reflect  seriously  on  your  credit  standing,  and  we  sincerely  hope 
that  in  your  own  interest  you  will  not  force  us  to  this  extreme. 

We  will  hold  in  abeyance  for  your  reply  and  remittance  not 
later  than  March  1. 

Yours  truly. 

Harmony  &  Company 
By  J.  Weston 

Treasurer 
Tickler  for  March  1. 


Procedure  and  Practice  173 

By  that  elate  some  report  should  have  been  received 
from  interchange  inquiries  and  possibly  from  salesman. 
Also,  if  the  customer  has  any  regard  for  his  credit,  some 
reply  should  have  been  received  from  him.  If  so,  the 
next  step  will  of  course  be  modified  or  at  least  the 
giving  of  the  account  to  an  attorney  will  be  delayed 
until  another  letter  has  been  written.  Short  of  some 
proposition  reasonably  satisfactory  and  plausible  after 
considering  all  recently  secured  information,  the  next 
best  move  is  to  visit  the  customer  at  his  place  of  business 
or  to  send  a  good  adjuster  to  see  him. 

Peesonal  Call 

This  of  course  is  expensive,  more  so  indeed  than  would 
be  justifiable  for  accounts  in  general.  The  amount 
involved,  however,  is  sufficient  to  justify  the  exercise  of 
every  precaution  to  avoid  precipitating  a  failure,  at  least 
until  every  reasonable  effort  towards  liquidation  has 
been  exhausted.  Besides,  aggravated  as  this  case  is  from 
every  visible  standpoint,  it  may  still  be  possible  to  clear 
it  up  on  the  ground  and  to  develop  some  basis  for  con- 
tinuing a  satisfactory  account.  A  change  of  front  from 
giving  to  an  attorney  to  a  personal  call  can  easily  be 
justified. 

This  collection  has  been  developed  consistently  and 
rapidly,  the  correspondence  having  been  altogether  one 
sided.  Of  a  hundred  similar  cases,  probably  ninety  would 
have  been  closed  by  payment  after  some  one  of  the 
letters,  of  the  remaining  ten,  five,  or  six  would  have  paid 
all  or  part  after  telegram ;  and,  unless  actual  insolvency 
exists,  the  others  would  have  been  paid  on  re<jeipt  of 
the  fifth  letter.     Had  the  debtor  answered  any  letter, 


174  Collections 

the  succeeding  letters  would  liave  been  modified  to  meet 
the  new  element  or  elements  injected  by  what  the  debtor 
had  said.  Also,  a  review  of  the  credit  file  and  record, 
which  should  have  been  made  about  the  third  letter, 
might  have  indicated  some  special  turn  or  suggestion 
other  than  continued  and  increasing  pressure. 

Eesults,  however,  in  the  handling  of  the  ordinary 
commercial  account  where  no  special  hazard  has  become 
apparent  are  more  dependent  on  a  building-up  of  increas- 
ing pressure  at  consistent  intervals  than  on  the  best 
efforts  at  finding  an  excuse  and  fitting  the  correspondence 
thereto.  Indeed,  where  the  debtor  answers  letters  set- 
ting up  excuses,  it  is  usually  the  case  that  the  excess 
time  already  taken  is  full  concession  to  the  situation,  at 
least  so  far  as  it  overruns  what  should  have  been  fore- 
seen and  provided  for  when  the  liability  was  incurred. 

There  are  cases  where  conditions  that  could  not 
reasonably  have  been  expected  arise.  These  should  be 
treated  according  to  their  merits,  erring  on  the  side  of 
liberality  rather  than  otherwise,  unless  the  situation  is 
so  acute  and  far  gone  that  nothing  short  of  final  liquida- 
tion is  possible.  The  quicker  a  wind-up  is  accomplished, 
the  better  for  all  concerned.  Such  cases,  however,  are 
exceptions. 

The  collector  of  commercial  accounts  must  not  over- 
look these  exceptions,  but  his  work  is  to  a  far  greater 
extent  with  the  chronic  slow  pay,  the  customer  constitu- 
tionally and  temperamentally  slow,  the  one  just  as  cer- 
tainly delinquent  on  an  account  on  terms  of  one  year  as 
on  terms  of  sixty  days.  He  may  be  selling  goods  in  the 
spring  and  summer  to  his  trade  on  fall  terms  and  be 
taking  in  no  more  than  is  necessary  to  pay  current 
expenses,  at  the  same  time  to  recognize  this  with  such 
debtors  on  a  July  maturity  and  to  extend  the  time  to 


Procedure  and  Practice  175 

October  would  mean  collection  after  a  logically  built-up 
pressure  beginning  with  October,  whereas  if  this  pressure 
had  been  started  in  July,  collection  could  have  been 
effected  in  October.  The  only  practical  difference  in 
handling  these  chronics  in  the  season  when  the  collector 
knows  they  are  getting  in  very  little  money  and  in  the 
season  of  active  returns,  is  that  in  the  slack  season  suit 
or  threat  of  suit  should  be  deferred. 

These  are  the  extreme  cases,  but  an  understanding 
and  a  facility  in  handling  such  make  the  milder  ones 
easy.  Perhaps  in  the  ultimate  analysis  these  "chronics" 
should  not  be  in  business,  or  should  be  denied  credit 
altogether,  which  would  really  mean  the  same,  and,  in 
fact,  they  nearly  all  do  sooner  or  later  fail.  At  the  same 
time  there  are  many  of  these  that  have  dragged  along 
for  years,  and  the  impression  is  prevalent  that  it  would 
be  suicidal  to  cut  them  off  so  long  as  ultimate  collection 
is  reasonably  assured.  The  logical  procedure,  therefore, 
is  to  recognize  them  and  deal  with  them  according  to 
their  merits.  They  are  not  thin  skinned;  rather  they 
have  become  callous  from  constant  prodding.  True, 
they  sometimes  squirm  a  little,  or  even  growl,  but  that 
does  not  really  mean  a  hurt,  and  does  not  affect  future 
relations  unless  a  sensitive  salesman  takes  it  to  heart 
and  helps  them  work  up  a  case  of  resentaient. 

A  good  collector,  having  the  welfare  of  his  business 
always  in  mind,  is  of  course  as  anxious  to  conserve  the 
good-will  of  desirable  customers  as  is  any  salesman  and 
will  not  unnecessarily  take  such  action  as  will  result  in 
withdrawal  of  desirable  business.  A  customer  may 
drag  to  such  an  extent  that  his  account  is  no  longer 
desirable,  or  he  may  infer  from  some  necessarily  sharp 
letter  in  connection  with  the  collection  of  his  last  account 
that  further  credit  cannot  be  expected  even  when  no 


176  Collections 

such  threat  has  been  made  or  implied,  and,  indeed,  where 
there  has  been  no  such  intent,  the  salesman  consequently 
has  had  no  advice  to  avoid  selling  or  to  sell  for  cash. 
Under  such  circumstances  it  frequently  occurs  that  when 
<  a  salesman  calls  he  is  met  by  a  customer  with  a  much 
injured  air  on  account  of  alleged  harsh  or  unfair  treat- 
ment by  the  collection  department.  The  customer  may 
even  threaten  to  place  his  business  in  the  future  where 
it  will  be  appreciated,  where  he  can  expect  decent 
treatment. 

Of  two  possibles  lines  of  action,  the  easier  is  too 
frequently  taken  by  the  salesman,  who  naturally  is  keen 
for  an  order;  viz.,  he  expresses  regret  and  apologizes  by 
laying  the  blame  on  routine  or  irresponsible  clerks  and 
assures  the  customer  that  the  letters  he  objected  to  really 
mean  nothing  and  winds  up  by  assuring  him  that  he,  the 
salesman,  will  personally  undertake  to  see  that  there  will 
be  no  repetition.  This  plan  of  handling  leaves  the 
customer  in  a  frame  of  mind  that  is  nearly  sure  to  ulti- 
mately result  in  the  necessity  for  collection  treatment 
that  will  drive  his  business  to  other  quarters,  or,  if 
tendered,  to  its  being  declined. 

The  other  and  better  position  for  the  salesman  to 
take  is  to  ask  to  see  the  objectionable  correspondence 
and  develop  the  exact  facts,  and  from  these  facts  defend 
the  office  and  point  out  in  diplomatic  terms  what  the 
customer  might  have  done  to  avoid  the  unpleasantness. 
Then,  if  he  gets  an  order,  there  is  less  likelihood  of 
necessity  for  repeating  previous  harshness  unless,  indeed, 
the  customer  is  incorrigible.  This  treatment  also  enables 
the  salesman  to  discover  the  possible  cases  where  cus- 
tomers are  written  unwarranted  letters  and  to  bring 
these  to  the  attention  of  his  principals.  The  salesman 
should  work  for  his  firm  in  every  relationship. 


Procedure  and  Practice  111 

Co-operation   of   Collectors  and   Salesmen 

The  foregoing  suggests  an  early  getting-together  of 
the  collector  and  the  salesman.  The  salesman  should 
be  advised  of  all  past-due  accounts  in  his  territory.  In 
the  earlier  stages  of  the  delinquency  a  simple  monthly 
list  showing  name,  address,  amount  delinquent,  and 
maturity  date  is  all  that  is  required.  From  this,  the 
salesman  has  an  opportunity  to  take  the  matter  up  cas- 
ually with  his  customer  and  develop  the  case  on  its  merits 
and  make  such  report  as  will  insure  intelligent  handling 
by  the  collector.  When  the  delinquency  has  continued 
to  a  point  where  treatment  more  drastic  than  ordinary 
becomes  necessary,  copies  of  letters  written  should  be 
sent  to  the  salesman  with  request  for  advice,  information, 
or  assistance  if  he  sees  a  way  by  which  he  from  his 
personal  acquaintance  with  the  customer  and  his  circum- 
stances can  be  of  service.  Then,  before  such  action  is 
resorted  to  as  will  make  it  undesirable  to  accept  new 
business  from  him,  the  salesman  should  be  notified  of 
such  impending  action  and  given  an  opportunity  to  make 
the  collection  and  save  his  customer  for  future  business. 
This  method  of  co-operation  results  in  the  full  acqui- 
escence of  the  salesman  when  drastic  action  becomes 
necessary,  as  well  as  the  avoidance  in  many  cases  of 
harshness  by  the  collector. 

Teamwork  of  departments  is  always  profitable,  but 
nowhere  does  it  count  for  more  than  between  the  col- 
lector and  the  salesman.  At  the  same  time  it  is  desirable 
to  avoid  placing  the  burden  of  collections  unnecessarily 
on  the  salesman.  So  long  as  an  account  can  be  handled 
by  ordinary  correspondence  the  salesman  should  not  be 
asked  to  deviate  from  his  regular  course.  This  is 
particularly  true  if  the  customer  is  one  of  the  multitude 


178  Collections 

of  chronic  slow  pays  considered  safe.  This  class  is 
accustomed  to  sharp  letters  and  there  is  little  danger 
of  driving  it  away  so  long  as  the  account  is  worth 
bothering  with. 

Retail  Accounts 

The  same  broad,  underlying  principles,  personal  and 
psychological,  as  have  been  outlined  in  the  consideration 
of  wholesale  accounts,  are  pertinent  to,  and  applicable 
in,  ihe  collection  of  retail  accounts.  On  account,  however, 
of  the  difference  in  the  use  of  the  commodity  represented, 
the  basis  for  the  credit,  and  the  source  from  which  funds 
for  payment  must  be  derived,  a  somewhat  different 
practice  with  regard  to  detail  of  procedure  becomes 
necessary. 

The  commodity  represented  in  the  wholesale  account 
is  purchased  for  resale  at  a  profit,  or  for  conversion  into 
a  more  highly  finished  product,  then  to  be  sold  at  a  profit 
over  the  original  cost  and  on  the  cost  of  conversion  as 
well. 

The  commodity  of  the  retail  account  goes  into  actual 
consumption  or  into  use  from  which  the  value  rapidly 
deteriorates. 

The  basis  for  the  wholesale  credit  is  the  progress  of, 
and  investment  in,  the  business,  plus  the  value  added 
by  the  commodity  of  the  account  itself. 

The  basis  for  retail  credit  lies  entirely  outside  the  use 
to  which  the  commodity  of  the  account  is  put.  The  means 
for  pajTnent  of  the  wholesale  account  can  be  predicated 
to  a  degree  on  tlie  resale,  or  conversion  and  sale,  of  the 
commodity  of  the  account.  On  the  other  hand,  payment 
of  a  retail  account  is  dependent  on  personal  income, 
earning  power,  or  accumulated  resource. 

Notwithstanding  these  marked  differences,  preliminary 


Procedure  and  Practice  179 

routine  is  practically  the  same,  and  likewise  success  in 
collecting  is  dependent  on  learning  all  the  facts  and 
^tting  the  treatment  to  the  facts.  The  principles  of  close 
and  prompt  following  of  all  overdue  accounts  and  of  a 
definite  understanding  regarding  terms  of  payment  shall 
definitely  guide  all  procedure. 

Review  the  information  on  which  the  credit  was 
extended,  and  revise  and  bring  down  to  date.  If  credit 
was  based  on  security,  exert  reasonable  effort  to  collect 
otherwise,  then  proceed  against  the  security.  If  through 
inadvertence,  bad  judgment,  or  carelessness,  a  large 
account  has  been  permitted  where  only  a  small  one  was 
justifiable,  do  not  make  the  mistake  of  paralyzing  the 
debtor  by  demanding  a  payment  of  five  hundred  dollars 
when  you  know  he  never  had  over  fifty  dollars  at  a  time 
in  his  life.  It  is  better  to  coax  twenty-five  dollar  pay- 
ments and  keep  them  coming  regularly.  An  arrangement 
for  piecemeal  or  instalment  collections  under  such  cir- 
cumstances is  good  business.  Payments  should  fall  due 
when  wages  are  paid  or  when  other  circumstances  place 
money  in  the  hands  of  the  debtor. 

In  short,  every  account,  wholesale  or  retail,  that  runs 
beyond  the  stage  of  routine  treatment,  should  be 
considered  as  a  separate,  a  different,  problem  for  solu- 
tion. First,  the  collector  should  be  sure  of  all  the  facts 
and  figures;  then,  if  an  old  rule  is  applicable,  work  it 
out  accordingly.  If  he  finds,  however,  that  no  rule  of 
his  practice,  or  within  his  knowledge,  applies,  he  must 
set  himself  the  task  of  evolving  a  rule  to  fit  the  case  in 
hand. 

Frequently,  perhaps  generally,  the  basis  for  retail 
credit  is  less  tangible  than  that  for  wholesale  credit. 
On  the  other  hand,  the  retail  debtor  is  generally  near 
at  hand  so  that  he  may  be  reached  easily  and  at  small 


180  Collections 

expense  for  a  personal  interview;  consequently  the 
disadvantage  in  the  basis  of  credit  is  offset  by  the  oppor- 
tunity for  advantageous  and  intelligent  handling. 

The  advantage  of  personal  contact  should  never  be  lost 
sight  of  and  wherever  amount,  condition,  or  opportunity 
warrants,  the  coUector  should  work  by  personal  calls  in 
either  wholesale  or  retail  accounts. 

Inducements — Knacks — Tricks 

Aside  from  cash  discounts,  which  have  served  their 
intent;  viz.,  the  elimination  of  time  for  a  money  con- 
sideration, before  the  account  has  become  of  interest  to 
the  collector,  the  effecting  of  collection  by  concessions, 
or  allowances,  is  unethical  and  pernicious  and  should  not 
be  countenanced.  Of  course,  if  the  debtor  has  a  legitimate 
claim,  or,  even  if  he  only  thinks  he  has  and  is  honest 
in  his  belief,  such  claim  should  receive  careful  considera- 
tion and,  if  its  correctness  is  established,  it  should  be 
allowed.  If  a  claim  is  of  such  nature  as  to  make  it 
impossible  to  determine  definitely  \vith  regard  to  its 
merits,  it  is  permissible  to  make  reasonable  allowance 
for  probable  correctness  if  it  is  made  in  evident  good 
faith  and  not  as  a  mere  pretext  in  order  to  secure  an 
unwarranted  rebate.  Beyond  such  legitimate  conces- 
sions, it  is  better  to  lose  the  entire  account  than  establish 
precedent  for  a  practice  which,  if  it  became  habitual, 
could  easily  be  construed  into  an  admission  of  loaded 
charges  for  the  purpose  of  establishing  a  basis  for 
purchasing  payment. 

Experienced  collectors  generally  develop  from  their 
practice  little  knacks,  or  cuts,  from  which  they  secure 
satisfactory  results,  such  as  awkward  calls,  writing  to 
friends,  letter  or  call  from  the  boss,  telephone  reminder 
on  the  day  when  the  amount  falls  due,  and  numerous 


Procedure  and  Practice  181 

other  schemes  that  sometimes  prove  effective.  It  is 
usually  a  question  of  measuring  wits  against  wits.  These 
practices,  however,  must  be  the  outgrow^th  of  the  peculiar 
personality  of  the  collector  applied  to  a  quick  conception 
of  the  idiosyncrasies  of  the  debtor  and  his  resource, 
together  with  an  understanding  of  the  general  situation 
and  the  popular  view  as  to  the  prosperity  and  the  busi- 
ness activity  of  the  moment  and  for  the  immediate  future. 
The  success  attributed  to  such  knacks,  or  turns,  should, 
without  doubt,  be  credited  to  the  greater  confidence  they 
give  to  their  originators,  rather  than  to  their  inherent 
efficacy. 

Difficult  collections,  too,  are  sometimes  made  by  means 
of  decoys,  surprises,  tricks ;  and  while  it  is  a  grave  ques- 
tion as  to  whether  one  is  ever  justified  in  departing  from 
the  straightforward  in  any  business  transaction,  it  is 
difficult  to  condemn  the  meeting  and  the  overthrow  of 
dishonest  intent  or  practice  by  any  available  means.  In 
any  event,  the  cases  requiring  such  procedure  to  insure 
success  are  rare ;  and  their  solution  dei>ends  on  discover- 
ing an  opening,  never  twice  alike,  and  an  immediate 
pushing  of  such  opportunity,  or  advantage.  Such  cases, 
however,  do  not  fall  within  rules,  but  are  exceptions,  the 
solution  of  which  depends  altogether  on  the  personal 
ingenuity  of  the  collector. 


TEST  QUESTIONS 

1.  What  purpose  do  practical  examples  and  illustrations 
serve  in  the  study  of  collection  problems? 

2.  In  the  example  given,  why  was  the  draft  drawn  December 
17  for  $127.43  only,  when  Jas.  Cooper  &  Co.  were  indebted  to 
Harmony  &  Company  for  several  times  that  amount? 

3.  What  is  the  purpose  of  the  first  follow-up  letter  ? 


182  Collections 

4.  In  what  regards  does  the  second  letter  differ  from  the 
first? 

5.  Analyze  the  various  points  of  progression  in  these  suc- 
cessive letters. 

6.  How  can  telegrams  be  used  in  collecting  accounts,  and 
what  is  their  special  value  ? 

7.  What  precautions  are  to  be  observed  in  the  use  of  tele- 
grams? 

8.  When  is  a  personal  call  justifiable  ? 

9.  Explain  how  the  salesman  can  co-operate  with  the  collec- 
tion department  and  how  he  may  weaken  the  work  of  the  col- 
lection department  in  collecting  delinquent  accounts. 

10.  How  do  the  foregoing  principles  apply  to  the  collection 
of  retail  accounts? 

11,  Explain  the  use  and  limitations  of  special  inducements 
and  tricks  in  collection  work. 


CHAPTER  XI 
co-operative  collections 

Object 

After  a  collection  has  been  worked  through  all  ordinary 
routine  without  result,  an  investigation  frequently  dis- 
closes a  case  where  there  are  sufficient  assets,  if  properly 
handled,  to  pay  out,  or  largely  so,  at  any  rate.  Occa- 
sionally, plans  can  be  devised  by  which  the  indebtedness 
may  be  worked  out  so  as  to  leave  a  live,  going  business. 
In  other  cases,  it  is  impossible  to  pay  at  present  or,  if 
anything  is  paid  to  one  creditor,  it  is  at  the  expense  of 
an  injustice  to  another.  A  suit  for  enforcement  of  the 
collection  would  compel  other  creditors  to  take  action 
to  prevent  a  preference;  this  action  usually  takes  the 
form  of  a  petition  in  bankruptcy,  filed  either  by  the 
debtor  himself,  or  by  three  or  more  creditors. 

Avoid  Receivership  and  Bankruptcy 

Liquidation  through  bankruptcy  proceedings  is  expen- 
sive and  affords  no  very  elastic  opportunity  to  take 
advantage  of  seasons  or  economic  conditions  in  con- 
verting merchandise  or  collecting  outstandings,  and, 
consequently,  the  net  amount  available  for  creditors  is 
reduced  to  a  point  resulting  in  heavy,  if  not  total,  loss. 
On  the  other  hand,  a  gradual  economical  liquidation  of 
the  assets  without  fees  for  lawyers,,  receivers,  trustees, 
and  other  expenses  incident  to  bankruptcy  processes  may 
result  in  considerable  advantage  to  creditors. 

183 


184  '  Collections 

If  a  condition  of  insolvency  or  serious  embarrassment 
is  discovered  in  time,  a  meeting  of  creditors  should  be 
held  and  arrangements  entered  into  for  a  liquidation  by 
or  under  the  direction  of  a  committee  of  tlie  creditors 
for  the  pro  rata  benefit  of  all.  The  honest  debtor  can 
always  be  counted  on  to  co-operate  to  the  fullest  in 
furthering  such  liquidation,  but  to  what  extent  his 
services  can  profitably  be  used  depends  largely  on  the 
state  of  the  case  and  the  reasons  for  the  embarrassment. 
If  assets  are  ample  and  the  debto-r  is  merely  tied  up 
temporarily  on  accomit  of  some  unforeseen  contingency, 
all  that  may  be  necessary  is  for  the  creditors  to  agree  to 
a  uniform  extension  and  leave  it  to  the  debtor  alone, 
or  under  a  very  general  supervision  of  a  creditor's 
committee,  to  work  it  out. 

If,  on  the  other  hand,  the  business  is  suffering  on 
account  of  some  inherent  weakness  or  on  account  of  lack 
of  business  ability  or  intelligence  of  the  debtor,  it  is 
better  to  secure  an  equitable  assignment  of  all  assets  and 
relieve  the  debtor  from  any  further  participation. 

If  the  difficulty  is  lack  of  ability,  the  debtor  may  not 
realize  that  he  has  failed  and  may  demur  at  a  total 
withdrawal.  Under  such  a  condition,  he  is  very  likely 
to  have  rosy  views  of  being  able  to  recover  if  given 
an  opportunity  to  do  so,  and  will  agree  to  a  moderate 
limit  of  extension  and  to  retire  if  by  the  stipulated  time 
he  has  failed  to  show  certain  results.  If  the  assets  are 
of  a  nature  and  an  amount  to  justify  some  expense  in 
conservation,  a  contract  may  be  entered  into  giving  the 
debtor  his  chance  under  proper  surveillance  and  at  the 
same  time  transferring  the  assets  for  the  benefit  of  the 
creditors  at  the  expiration  of  the  extension. 

It  is  desirable  that  the  extension  contract  also  cover 
the  transfer,  otherwise  the  debtor  having  developed  some 


Co-operative  Collections  185 

other  reason  may  insist  on  further  indulgence.  Con- 
versely, some  of  the  creditors  having  lost  patience  mil 
probably  start  proceedings  to  force  liquidation  rather 
than  spend  more  time  and  money  in  an  effort  at  co-opera- 
tive adjustment. 

Agreements  for  general  extension  under  creditors' 
supervision,  whether  embodying  terms  for  complete 
liquidation  or  not,  should  be  drawn  with  great  care.  It 
is  necessary  to  safeguard  the  interests  of  the  debtor  and 
all  the  creditors  and  particularly  to  protect  the  committee 
from  personal  liability.  Conditions  are  different  in 
different  cases;  also,  legal  requirements  in  different 
states  vary  widely.  For  these  reasons,  no  general  form 
for  such  agreements  is  practicable,  and  on  account  of 
the  legal  phase  a  special  agreement,  covering  the  condi- 
tions as  they  exist,  should  be  drafted  under  the  direction 
of  a  lawyer  for  each  case. 

Usually,  some  claimants  will  be  represented  in  the 
creditors'  meeting  by  local  lawyers,  who  for  a  nominal 
general  fee,  in  addition  to  their  commission  on  the  claims 
in  their  hands,  will  be  glad  to  assume  responsibility  as 
to  legal  forms  and  requirements.  Such  employment  of 
the  lawyers  interested  tends  also,  for  obvious  reasons, 
to  safeguard  against  other  legal  processes,  which  might 
result  in  reduced  returns  to  the  creditors. 

Elements  of  Successful  Co-operative  Collections 

The  elements  essential  to  profitable  co-operative  col- 
lection or  liquidation  are : 

(1)  Getting  into  the  case  before  several  claims  have 
been  placed  with  attorneys  for  pressure.  The  lawyer's 
training  tends  to  develop  not  only  respect  but  also  prefer- 
ence for  court  processes.  Again,  there  is  a  technical  and 
tactical  advantage  to  the  lawyer  personally,  if  not  to 


186  Collections 

his  client,  in  his  representing  the  petitioning  creditors 
in  bankruptcy  action.  If  other  attorneys  have  claims, 
he  can  gain  this  advantage  and  excuse  himself  to  any 
protesting  creditor  by  saying  that  bankruptcy  was 
inevitable  and  that  if  he  had  not  filed  the  petition  some- 
one else  would  have  done  so. 

(2)  There  must  be  merchantable  and  collectible  assets 
in  such  amount  as  to  make  it  worth  while  for  all  the  cred- 
itors to  defer  their  claims  for  a  time  and  to  justify  at  least 
a  committee  of  the  creditors  in  giving  some  time  to  the 
liquidation.  The  committee  is  usually  made  up  of  the 
representatives  of  the  largest  creditors;  one  member  at 
least,  if  possible,  should  be  a  resident  in  the  debtor's 
vicinity. 

(3)  If  the  case  is  one  for  final  liquidation  or  one  in 
which  for  any  reason  the  debtor  is  not  a  proper  party  to 
conduct  the  business,  there  must  be  some  available 
individual  of  proper  qualifications  willing  to  take  charge 
under  the  committee  for  such  rate  of  compensation  as 
may  be  justified  by  the  conditions  and  the  volume  and 
the  value  of  the  assets. 

TEST  QUESTIONS 

1.  What  is  meant  by  co-operative  collections? 

2.  Why  should  the  collector  strive  to  avoid  receivership  and 
bankruptcy  ? 

3.  When  is  a  collection  man  warranted  in  forcing  receiver- 
ship or  bankruptcy? 

4.  What    can    a    creditors'    committee    do    in    helping   to 
straighten  out  the  entangled  affairs  of  a  debtor? 

5.  What  are  some  of  the  special  points  to  observe  in  the 
contract  under  which  such  a  committee  is  organized? 

6.  What  are  the  three  elements  of  successful  co-operative 
collections  ? 


CHAPTER  XII 
collection  btt  legal  process 

Suit  on  the  Debt 

Collection  by  suit  has  already  been  referred  to  as  a 
final  step  in  the  collection  process.  This  method  is 
effective  when  the  debtor  has  property  subject  to  execu- 
tion. Even  in  some  other  cases  debtors  who  possess  no 
tangible  assets  nevertheless  prefer  not  to  have  a  judgment 
stand  against  them.  Such  debtors  offer  either  to  settle 
when  the  suit  is  instituted  or  to  pay  the  judgment  as  soon 
as  possible. 

Bankruptcy  Proceedings 

After  every  reasonable  effort  has  been  exhausted  by 
the  collector,  his  agent,  or  attorney,  to  secure  payment 
of  an  account  or  other  claim  without  result,  and  where 
co-operative  liquidation  is  not  practicable,  it  is  customary 
and  proper  to  appeal  to  the  courts  for  relief.  Before  the 
enactment  of  the  National  Bankruptcy  Act  it  was  possible 
under  the  laws  of  many  of  the  states,  not  only  to  seize 
the  property  of  the  debtor  and  force  it  to  sale  for  the 
benefit  of  a  judgment  creditor,  but  also  for  the  creditor 
first  beginning  suit  to  secure  a  claim  on  the  debtor's 
assets  prior  to  the  rights  of  other  creditors.  Under  such 
conditions  it  was  to  be  expected  that  the  debtor's  interest 
would  receive  little  consideration,  particularly  if  he  were 
known  to  be  involved  to  such  an  extent  that  his  assets 
at  forced  sale  would  not  be  sufficient  to  pay  all  his  obliga- 

187 


188  Collections 

tions.  Two  elements  of  tlie  situation  tended  to  incite 
hasty  action;  viz.,  the  advantage  to  be  gained  by  the 
creditor  first  instituting  suit  and  the  advantage  of  the 
attorney  representing  such  creditor. 

The  National  Bankruptcy  Act  through  its  provisions 
for  putting  all  creditors  not  previously  clearly  and 
equitably  secured  on  a  parity  has  reversed  this  tendency 
towards  securing  a  preference,  so  that  the  present  prac- 
tice is  to  avoid  bringing  a  debtor  into  court  except  as 
a  last  resort.  In  fact,  suit  for  debt  is  now  seldom 
resorted  to  unless  there  is  a  dispute  as  to  amount,  terms, 
or  equity  of  a  claim  which  the  parties  cannot  settle 
between  themselves,  or  unless  a  debtor  with  ample  assets 
for  some  reason  ignores  the  rights  and  the  demands  of 
the  creditor  until  all  patience  is  exhausted.  In  the  latter 
instance,  the  debtor  seldom  pennits  the  suit  to  proceed 
to  judgment,  although  there  are  occasional  debtors  who 
will  take  advantage  of  a  knowledge  that  immediate 
judgment  is  impossible  on  account  of  congested  courts  or 
other  causes  of  unavoidable  delay  in  order  to  secure  the 
benefit  of  time  to  which  they  have  no  just  claim. 

While  courts  have  their  function  and  place  in  our 
commerce,  they  are  resorted  to  by  the  prudent  business 
man  only  after  every  other  expedient  has  been  exhausted. 
"Where  the  services  of  a  lawyer  are  required,  he  should 
be  employed  rather  for  his  ability  to  avoid  getting  into 
court  than  for  his  keenness  and  acumen  in  the  courtroom. 
Indeed,  so  far  as  collections  are  concerned,  the  employ- 
ment of  an  attorney  or  the  threat  of  court  process  is  of 
doubtful  propriety  until  it  has  become  evident  that  noth- 
ing short  of  forcing  by  legal  process  will  avail.  On  the 
other  hand,  it  is  doubtful  economy  to  undertake  to  avoid 
the  expense  of  emplojTnent  of  counsel  wlion  a  collection 
is  against  the  estate  of  a  deceased  debtor,  or  when  the 


Legal  Process  189 

estate  is  being  administered  by  a  receiver,  or  is  in  bank- 
ruptcy, or  wlien  for  any  reason  there  are  special  legal 
formalities  of  any  nature  to  be  complied  with.         * 

Legal  Precautions 

Almost  all  business  organizations  of  any  considerable 
magnitude  have  legal  connections,  under  which  advice 
or  direction  on  questions  of  law  that  may  arise  from  day 
to  day  is  obtainable.  The  collector  should  avail  himself 
of  this  service  whenever  he  has  a  collection  that  leads 
him  out  of  the  usual  channels.  In  order,  however,  that 
he  may  judge  as  to  when  he  should  have  legal  advice,  he 
should  know  what  statutes  are  of  particular  interest  in 
their  bearing  on  his  particular  work.  He  should  know 
in  a  general  way  that  what  is  known  as  the  "statute  of 
limitations"  sets  a  limit  to  the  time  in  which  clauns  of 
various  kinds  may  be  enforced  by  law.  He  should  also 
know  that  this  statute  varies  widely  in  different  states 
and  that  in  the  same  state  it  varies  in  its  application  to 
accounts,  notes,  and  judgments,  and  he  should  inform 
himself  of  these  variations.  He  should,  likewise,  inform 
himself  with  regard  to  statutes  of  fraud,  statutes  defining 
the  status  of  accounts  against  infants,  or  against  estates 
in  which  minor  heirs  are  interested,  or  against  a  married 
woman.  He  should  know  in  a  general  way  of  legal  set- 
offs and  statutory  exemptions  and  of  rights  of  lien  and 
their  limitations.  He  should  read  the  Bankruptcy  Act 
and  fix  in  his  mind  its  requirements,  its  limitations,  its 
definitions.  He  should  realize  that  this  knowledge  is  of 
value  in  that  it  enables  him  to  judge  as  to  opportune 
times  for  invoking  assistance,  or  in  guarding  against 
complications. 

He  should  also  know  in  a  general  way  of  such  processes 
of  law  as  garnishment,  attachment,  replevin,  and  that 


190  Collections 

fraudulent  conveyances  can  be  set  aside,  and  that  where 
stocks  of  merchandise  are  sold  in  bulk  or  otherwise  than 
in  regular  course  of  trade,  certain  formalities  for  the 
protection  of  creditors  should  be  complied  with.  In 
every  case,  however,  where  the  application  of  these 
laws,  or  processes,  becomes  necessary,  either  offensively, 
or  defensively,  he  should  employ  a  lawyer  with  a  view 
(1)  to  keeping  out  of  court;  or  (2),  if  litigation  is 
unavoidable,  to  coming  into  court  with  a  clean  case. 

TEST  QUESTIONS 

1.  What  advantage  is  it  to  bring  suit  against  a  debtor  who 
has  no  tangible  assets  in  sight  ? 

2.  What  were  some  of  the  disadvantages  of  the  bankruptcy 
laws  as  they  existed  in  the  different  states  previous  to  the  enact- 
ment of  the  National  Bankruptcy  Act  ? 

3.  Why  was  it  often  an  advantage  for  a  creditor  to  be  the 
first  one  to  file  a  suit  ? 

4.  What  does  the  National  Bankruptcy  Act  provide  in 
regard  to  priority  of  rights  in  this  respect  ? 

5.  What  factors  should  be  taken  into  consideration  before 
resorting  to  legal  actions? 

6.  What  are  some  of  the  more  common  legal  questions  as 
related  to  debts  with  which  a  collector  should  be  familiar  ? 


CPIAPTER  XIII 
collection  agencies 

Reason  for  Existence 

The  extremely  liberal  and  lavish  extension  of  credit 
that  has  become  prevalent  under  modern  efforts  towards 
expanding  and  extending  business  connections  has  natur- 
ally resulted  in  a  multitude  of  slow,  uncertain,  even 
unwarranted  accounts.  At  the  same  time  the  number 
and  volume  of  such  accounts,  even  in  the  offices  of  the 
largest  extenders  of  credit,  is  seldom  sufficient  to  justify 
the  development  of  facilities  or  the  emplojnuent  of 
experts  for  the  most  expeditious  and  effective  following 
of  their  collections.  To  meet  these  conditions  what  are 
known  as  "collection  agencies"  have  been  organized  and 
developed. 

Methods  of  Work 

These  agencies  undertake  to  provide  facilities  and 
channels  for  the  efficient  handling  of  hard  collections 
either  in  their  immediate  vicinity  or  at  points  more  or 
less  remote,  through  established  connections  or  corre- 
spondents or  by  the  employment  of  traveling  adjusters. 
They  are  usually  owmed  and  operated  by  a  lawyer  or  firm 
of  lawyers  who  by  chance,  preference,  or  necessity  have 
undertaken  to  supplement  their  regular  practice  of  the 
law  by  assuming  the  functions  of  expert  collectors  even 
where  no  question  of  law  or  its  practice  is  involved.  For 
collections  away  from  home  they  make  use  of  lists  of 

191 


192  Collections 

lawyers  compiled  and  published  either  by  themselves  or 
by  others  similarly  or  more  elaborately  equipped,  or  by 
concerns  compiling  and  publishing  such  lists  for  profit. 

Fees  Charged  by  These  Agencies 

They  undertake  to  effect  collection  for  a  fee  or  com- 
mission contingent  on  results,  supplemented  by  a  safe- 
guard of  special  provision  for  compensation  in  case  of 
suit  or  in  localities  where  what  is  known  as  **bar  rates" 
prevail.  It  is  the  custom,  generally  understood  by  all 
parties  concerned,  that  the  commissions  or  fees  are  to 
be  divided  between  the  agency  forwarding,  and  the  local 
attorney  doing  the  work,  on  a  basis  of  two-thirds  to  the 
attorney  and  one-third  to  the  forwarding  agency.  It  is 
customaiy  to  make  no  charge  for  services  unless  collec- 
tion in  part  at  least  is  effected,  except  in  cases  where  suit 
is  necessary  and  where  an  agreement  for  special  com- 
pensation exists.  Where  an  advance  for  costs  and  fees 
for  ofiicers  of  the  court  is  required,  it  is  customary  for 
the  creditor  to  provide  for  such  an  advance. 

Nature  of  Their  Services 

Such  agencies  abound  in  every  jobbing  and  manufac- 
turing center.  Besides,  there  are  many  lawyers  and 
firms  of  lawyers  practicing  the  branch  of  their  profession 
knowTi  as  "commercial  law"  who  devote  a  large  part  of 
their  time  and  energies  to  collections,  so  that  to  all 
practical  intents  they  are  collection  agencies.  Among 
these  are  some  of  the  best  lawyers  and  likewise  some 
of  the  worst  shysters  with  all  intermediate  grades  in 
the  profession. 

Unfortunately  this  practice  affords  great  opportunity 
for  unscrupulous,  unethical  measures  with  small  oppor- 
tunity for  detection,  consequently  great  care  should  be 


Collection  Agencies  193 

exercised  in  the  selection  of  the  agency  to  whom  business 
is  entrusted. 

Inasmuch  as  the  function  of  a  collection  agency  in 
most  cases  is  merely  the  selecting  of  a  local  attorney  and 
the  forwarding  of  the  claim,  many  collectors  feel  that 
they  can,  and  should  expect,  better  service  from  the  local 
lawyer  by  dealing  direct  and  thus  relieving  him  of  the 
necessity  of  passing  one-third  of  his  fee  along  to  a  for- 
warding agency.  There  is,  however,  another  side  to  be 
considered;  viz.,  the  agency  serving  many  patrons  is 
more  apt  to  have  a  number  of  claims  from  time  to  time 
at  a  given  point  than  is  a  direct  forwarder,  so  that  the 
business  of  the  agency  even  on  a  divided  fee  basis  is 
more  valuable  to  the  local  lawyer  than  is  that  of  the 
direct  forwarder.  Then,  too,  the  agency  having  probably 
had  claims  at  the  same  point  previously  has  had  a  better 
chance  to  try  out  the  lawyers  and  to  eliminate  the  ones 
whose  services  or  methods  are  unsatisfactory. 

Precautions  in  Employing  Agencies 

The  great  opportunity  for  unethical  practice  in  con- 
nection with  collection  service,  together  with  the  multi- 
plicity of  agencies  in  excess  of  reasonable  demand  for 
such  service,  to  say  nothing  of  the  difficulty  in  selecting 
local  correspondents  of  ability  and  integrity  and  unbiased 
by  their  sympathies  for  their  neighbor,  the  debtor,  or  by 
their  own  political  or  other  local  interests,  constitutes 
without  doubt  the  most  difficult  problem  confronting  the 
collector  from  day  to  day. 

He  may  strike  an  agency  either  dishonest  or  so  hard 
pressed  that  it  takes  a  chance  on  using  its  client's  money, 
or  the  honest  and  forehanded  agency  may  forward  to  a 
local  lawyer  who  collects  and  uses  the  money.  In  either 
case  the  discovery  of  defalcation,  if  made  at  all,  is  by 


194  Collections 

accident  and  possibly  years  after  it  occurred.  Further- 
more, when  the  collector  does  discover  the  shortage  he 
has  no  recourse  except  ci\il  action  with  a  strong  proba- 
bility of  a  worthless  judgment  when  secured.  The 
agency,  or  the  lawyer  it  selects,  may  see  an  opportunity 
for  greater  profit  in  framing  a  deal  in  bankruptcy  or 
composition  for  the  debtor  direct  without  bankruptcy, 
and  sacrifice  the  client's  interest  in  furtherance  of  such 
a  scheme. 

The  client  so  served  has  no,  or  at  best  doubtful, 
recourse  and  indeed  seldom  has  ground  for  more  than 
suspicion  of  irregularity.  Even  though  such  practice  is 
only  occasional,  and  not  by  any  means  general,  in  the 
aggregate  it  has  an  important  bearing  on  average  results 
and  materially  adds  to  the  problems  and  perplexities 
with  which  the  collector  is  surrounded. 

Defalcations  can  be  recovered  (if  discovered)  by 
requiring  bonds  of  indemnity,  but  no  way  has  been  found 
for  overcoming  the  more  subtle  irregularities,  except 
forcible  condemnation  and  the  withdrawal  of  business 
and  confidence  from  the  offenders.  On  account  of  the 
impossibility,  regardless  of  good  intent,  of  receiving 
even  generally  satisfactory  service  through  agencies  or 
from  direct  forwarding  to  local  lawyers  and  from  a  feel- 
ing that  an  agency  or  a  lawyer  who  does  business  on  a 
contingent  fee  basis  is  compelled  in  his  own  interest  to 
work  along  destructive  rather  than  constructive  lines, 
some  wide  extenders  of  credit  maintain  an  organization 
of  private  adjusters.  These  adjusters  work  along  con- 
structive lines  and,  while  immediate  cash  may  not  always 
be  secured,  the  ultimate  outcome  is  the  best  for  their 
employers  and  is  effected  with  the  least  possible  disad- 
vantage to  the  debtor.  If  the  service  of  a  lawyer  is 
required,  the  adjuster  has  not  only  the  advantage  of 


Collection  Agencies  195 

published  lists,  open  or  bonded,  but  has  also  the  further 
advantage  of  being  in  a  position  to  check  his  local 
standing  and  his  relation  to  the  debtor. 

Personal  Adjustment  Services 

Recognizing  the  need  for  a  more  dependable  collection 
service  than  is  possible  through  forwarding  agencies  and 
local  attorneys  selected  more  or  less  at  random  from 
published  lists  in  which  the  names  are  inserted  for  a 
consideration,  certain  agencies  and  commercial  lawj'-ers 
have  in  recent  years  been  offering  what  is  known  as 
"personal  adjustment  service."  These  organizations 
undertake  to  present  all  claims,  or  at  least  all  claims 
above  specified  amounts,  in  person  by  a  trained  adjuster 
who  will  represent  the  creditor's  interest  not  merely  to 
the  extent  of  securing  payment  but  with  a  view  to  foster- 
ing the  good-will  of  the  debtor  and  retaining  his  custom 
if  he  is  in  condition  to  merit  further  credit. 

These  adjusters  are  not  lawyers,  or,  if  they  are,  they 
do  not  approach  a  debtor  as  a  lawyer  but  as  a  business 
man  or  an  employee.  Finding  the  debtor  short  of  ready 
funds,  the  adjuster  does  not  either  in  words,  or  by  his 
appearance  as  a  lawyer,  suggest  suit,  costs,  seizure  of 
property,  and  sale  at  a  sacrifice ;  but,  rather,  enters  into 
the  debtor's  problem  and  endeavors  to  find  a  way  to 
serve  his  employer  and  at  the  same  time  avoid  entailing 
a  hardship  on  the  debtor.  On  the  other  hand,  since  he  is 
on  the  ground,  in  his  efforts  to  develop  a  basis  for 
constructive  handling,  he  can  detect  cases  of  hopeless 
insolvency  and  if  he  is  unable  to  collect  or  secure  his 
employer's  claim,  he  will  take  immediate  measures  to 
prevent  dissipation  of  such  assets  as  remain,  not  only 
in  the  interest  of  his  employer,  but  also  of  other  creditors 
as  well.     In  short,  this  service  undertakes  as  a  temporary 


196  Collections 

employee  to  serve  the  creditor  whose  volume  of  business 
or  whose  disposition  does  not  warrant  a  regular  adjust- 
ment department  of  his  own,  on  the  same  basis  as  would 
his  own  private  adjuster. 

Theoretically  this  service  is,  or  should  be,  ideal. 
Practically,  it  is  surrounded  with  many  difficulties  and 
contingencies  which  may,  and  frequently  do,  defeat  its 
intent  and  mar  its  success,  certainly  in  many  cases,  and 
possibly,  so  far  as  developed,  on  the  whole.  It  is  expen- 
sive, requiring  as  it  does  the  payment  for  time  and 
traveling  expense  of  the  adjuster.  This  restricts  the 
service  to  large  claims  which  are  probably  against 
debtors  with  material,  even  if  inadequate,  assets;  or,  if 
smaller  claims  are  to  be  so  handled,  there  must  be  a 
large  enough  clientage  to  afford  a  basis  for  making  up 
traveling  routes  that  will  reduce  the  average  time  and 
expense  per  claim  to  a  low  point.  Confining  the  service 
to  the  large  claims  means  simply  skimming  the  oppor- 
tunity and  leaving  the  lesser  items  which  call,  com- 
mensurately,  for  special  attention  to  even  a  greater 
degree  than  do  the  large  ones,  to  be  followed  through 
the  forwarding  service  or  some  other  plan  even  less 
certain  and  effective. 

If  a  service  covering  all  claims  big  and  little  alike  is 
attempted,  a  large  expenditure  in  conducting  the  business 
while  a  clientage  large  enough  to  make  it  self-supporting 
is  being  built  up  is  inevitable.  Such  investment,  in  view 
of  the  uncertainty  of  the  outcome,  and  no  tangible  assets 
to  show  for  it,  is  not  inviting. 

Such  service,  if  honestly  rendered,  without  doubt, 
merits  much  higher  rates  of  compensation  than  does  the 
ordinary  forwarding  service.  It  is  difficult,  however,  to 
convince  the  rank  and  file  credit-extenders  of  this  fact, 
or  of  the  fact  that  better  service  can  be  depended  upon, 


Collection  Agencies  197 

and  where  they  are  so  convinced  it  is  at  the  expense  of 
the  promoter's  time  and  money  which  must,  of  course, 
be  added  to  the  cost  of  the  service.  Also,  creditors, 
because  they  are  prone  to  feel  that  their  accounts  are 
good,  look  on  all  collection  expense  as  a  hardship  and  are 
disposed  to  take  a  chance  on  the  cheapest  channel  to 
which  the  burden  can  be  shifted. 

Obviously  the  problem  of  personal  adjustment 
agencies  resolves  itself  to  a  recognition  by  clients  and  a 
rendering  by  agencies  of  better  service;  and,  obversely, 
to  a  level  loading  of  all  rates  to  a  moderate  degree,  or  to 
a  heavier  loading  on  a  sliding  scale  as  claims  run  smaller, 
so  that  an  agency  honestly  conducted  and  controlling  a 
moderate  volume  of  business  can  pay  its  expenses  and 
realize  a  fair  profit. 

An  attempt  to  combine  personal  adjustment  service 
with  forwarding  service  is  not  feasible  on  account  of  the 
temptation  of  the  agency  to  attempt  to  realize  greater 
profit  and  particularly  to  avoid  the  risk  of  traveling 
expense  to  distant  points;  and,  on  the  other  hand,  on 
account  of  the  existence  of  constant  ground  for  suspicion 
that  such  shirking  of  responsibility  is  prevalent.  Be- 
sides, if  forwarding  service  is  weak  at  all,  and  practically 
all  who  have  studied  it  are  agreed  that  the  best  of  it  is 
inherently  and  unavoidably  weak,  its  greatest  weakness 
can  be  expected,  and  certainly  applies,  in  the  smaller 
accounts  where  the  commission  is  not  large  enough  to 
lift  it  above  its  shortcomings. 

Evolution,  education,  both  among  credit-extenders  and 
agencies  will  no  doubt  in  time  develop  the  means  of  true 
economy  of  realization  and  conservation.  In  the  mean- 
time there  will  be  more  or  less  floundering  both  by  clients 
trying  to  find,  and  agencies  endeavoring  to  give,  the 
best  service  possible  within  the  limits  of  justifiable 
compensation. 


198  Collections 

TEST  QUESTIONS 

1.  What  is  a  collection  agency? 

2.  How  do  collection  agencies  perform  their  work? 

3.  Wliat  are  the  fees  charged  by  such  agencies,  and  how  are 
they  distributed? 

4.  What  special  facilities  do  such  agencies  often  possess  for 
collecting  distant  accounts? 

5.  What  are  some  of  the  precautions  to  be  observed  in 
emplojaug  the  services  of  such  agencies? 

6.  Explain  the  work  of  personal  adjustment  services. 

7.  What  are  the  advantages  and  disadvantages  in  the  employ- 
ment of  personal  adjustment  services? 


CHAPTER  XIV 

CONCLUSION 

True  education,  whether  broad,  general,  or  highly 
specialized,  does  not  consist  of  a  mass  of  facts,  or  even 
of  principles,  memorized,  stored  away,  as  it  were,  to  be 
recalled  for  use  or  application  at  opportune  times. 
Rather,  it  consists  of  a  development  of  the  ability  to 
recognize  fundamentals  and  relations  and  from  these  to 
construct  by  reasoning,  association,  and  assembly  a  solu- 
tion for  any  and  every  problem  of  life. 

Solution  of  life  problems,  whether  social,  or  commer- 
cial, hinge,  like  court  decisions,  more  on  the  points  of 
difference  than  on  the  similarity  to  cases  previously 
worked  out.  The  superficial  mind  will  note  prominent 
features  that  are  similar  and  pronounce  two  cases 
identical,  although  application  of  previous  solution  fails 
to  satisfy.  The  analytical,  the  logically  developed  mind, 
will,  while  taking  full  cognizance  of  the  points  of  simi- 
larity, detect  the  more  subtle,  the  more  obscure,  points 
of  difference  and,  giving  each  due  consideration,  will 
reach  a  conclusion  approximately  correct. 

The  reader  is  urged  to  consider  carefully  the  appli- 
cation of  the  principles  developed  in  this  work  to  his 
problem — the  problem  of  collections.  He  is  requested  to 
note  that  no  two  collection  problems,  where  they  have 
developed  to  the  point  of  being  real  problems,  are  alike. 
Even  if  the  physical  features,  resource,  liability,  mer- 
chandising,  conditions,   etc.,   were   identical    (and   they 

199 


200  Collections 

never  are),  there  would  still  be  tlie  limnan  element  to 
consider  wliich  means  diversity  unlimited.  Not  only  must 
he  realize  that  complete  satisfaction,  which  means  not 
only  the  effecting  of  the  collection,  but  also  the  develop- 
ment of  the  situation  for  future  relation,  or  the  discovery 
that  future  deals  cannot  be  considered — cannot  be  secured 
by  exactly  the  same  methods  in  any  two  cases — but  he 
must  also  realize  as  well  that  another  collector  could  not 
have  satisfactorily  solved  either  problem  by  the  same 
process  as  had  brought  success  to  himself.  In  other 
words,  the  human  element  has  its  bearing,  not  only  in  its 
relation  to  the  debtor  but  to  the  collector  as  well. 

Consequently:  Develop  and  follow  each  case  on  its 
merits,  keeping  in  mind  resource,  environment,  person- 
ality; and,  obversely,  avoid  trying  to  develop  rules, 
formulas,  and  processes  that  can  be  applied  to  all,  or 
even  many,  cases.  Likewise,  avoid  trying  to  utilize  forms, 
or  methods,  simply  because  they  may  have  been  success- 
fully employed  by  others. 

Certain  processes,  routines,  methods,  facilities,  and 
systems  are,  of  course,  desirable;  indeed,  necessary. 
These,  however,  are  for  the  mass  of  collection,  not  for 
any  particular  unit.  They  facilitate  and  insure  attention 
to  the  units  at  the  logical  time  for  each.  When  they 
have  brought  the  unit  to  the  attention,  it  should  be  con- 
sidered, handled,  as  individually  as  if  it  were  the  first, 
the  only,  collection  problem  in  the  universe  of  business. 
Eecognize  and  adjust  processes  to  the  individuality  of 
the  collector,  the  debtor,  the  case,  in  all  its  parts  and 
as  a  whole. 

Collector:  Realize  and  remember  that  liberality,  lax- 
ness,  is  not  always  a  kindness ;  that  firmness,  insistence, 
may  bo,  frequently  is,  the  spur  that  incites  the  debtor  to 
effort  in  his  own  interest  and  for  his  o^vn  good.    After 


Conclusion  201 

allowing,  even  to  the  point  of  great  liberality,  for  the  con- 
tingency that  could  not  have  reasonably  been  foreseen, 
press  for  your  just  dues,  not  only  because  you  have  a 
right  to  do  so,  but  with  a  realization  that  such  is  to  the 
interest  of  the  general  integrity  of  credit ;  indeed,  to  the 
best  ultimate  interest  of  the  debtor  himself. 

Going  forward  on  these  lines,  but  remaining  human 
withal,  you  mil  secure  to  yourself  satisfaction,  material 
and  personal,  and  at  the  same  time,  retain  the  friendship 
and  the  good-will  of  all,  including  the  chronic  slow  pay. 

TEST  QUESTIONS 

1.  On  what  principles  is  true  education  for  the  development 
of  business  power  based? 

2.  Explain  how  the  solution  of  commercial  problems  often 
hinge  more  on  points  of  difference  than  on  their  similarity  to 
cases  previously  worked  out. 

3.  What  is  the  danger  of  mere  imitation,  or  following  the 
example  of  another,  in  the  solution  of  business  problems? 

4.  Why  are  two  collection  cases  seldom  identical  ? 

5.  Does  this  mean  that  there  are  no  fundamental  principles 
on  the  basis  of  which  a  collection  man  solves  his  problems  ? 

6.  How  may  the  collector  aid  in  building  up  the  general 
integrity  of  credit? 


MAIL-ORDER  INSTALMENT 
COLLECTIONS 

CHAPTER  I 

fundamental  principles  of  mail-order 
instalment  accounts 

Theik  Place  in  Modekn  Merchandisikg 

''We  trust  the  people."  This  is  the  business  slogan 
of  a  great  institution  dealing  in  house  furnishings,  whose 
business  covers  the  continent  and  runs  into  millions  of 
dollars  annually.  Another  firm  of  equal  magnitude  in- 
forms us  that  all  we  need  to  do  is  to  furnish  the  girl — 
they  will  furnish  the  home  complete,  or  in  their  words 
''feather  the  nest"  by  their  " live-and-let-live "  policy  of 
easy  payments.  Attractive  advertisements  in  the  daily 
papers  picturing  cozy  suburban  bungalows,  to  be  paid 
for  "same  as  rent,"  lure  the  flat  dweller  from  the  city. 
In  the  words  of  a  thousand  instalment  concerns  through- 
out the  country,  "Your  credit  is  good"  for  real  estate, 
furniture,  automobiles,  pianos,  sewing  and  talking 
machines,  jewelry,  books,  clothing,  stocks,  bonds,  electri- 
cal appliances — in  fact  nearly  everything  that  the  average 
American  citizen  requires  or  thinks  he  requires  in  his 
pursuit  of  happiness.  It  has  been  said  that  one  possessed 
of  good  character  and  a  position  today  may,  if  he  wishes, 
be  established  tomorrow  as  a  householder,  enjoying  all 
the  necessities  and  many  of  the  luxuries  of  life — all  on 
the  instalment  plan. 

202 


Fundamental  Principles  203 

The  inauguration  and  growtlj  of  the  partial-payment 
system  has  brought  about  great  changes  in  the  methods 
of  merchandising  in  many  lines  of  business.  No  statistics 
are  available  to  indicate  the  volume  of  business  done 
annually  on  the  instalment  plan  and  its  relation  to  the 
total  volume,  but  in  certain  lines,  such  as  musical  instru- 
ments and  probably  real  estate  for  homes,  the  volume 
of  such  sales  doubtless  exceeds  that  of  the  cash  business, 
while  furniture,  vehicles,  the  better  grades  of  standard 
books,  and  many  other  lines  will  probably  average  equally 
between  the  two  methods. 

While  practically  anything  may  now  be  purchased  on 
the  instalment  plan,  the  method  itself  is  new,  relatively 
speaking,  having  had  its  inception  as  a  fixed  business 
policy  less  than  twenty  years  ago.  Only  during  the  past 
ten  years  has  it  assumed  proportions  sufficient  to  make 
the  collection  of  such  accounts  a  work  equal  to,  if  not 
surpassing  in  importance,  the  collection  of  the  orthodox 
''open  account." 

It  is  an  open  question  whether  or  not  the  instalment 
method  of  merchandising  is  an  unmixed  blessing  to  the 
public.  On  one  side  is  the  theory  that  the  plan  has 
brought  within  the  reach  of  the  small  wage-earner  and 
man  of  restricted  means  many  of  the  refinements  and 
luxuries  of  life,  thereby  raising  the  standard  of  living 
in  the  American  home.  Opposed  to  this  is  the  contention 
that  ''easy  payments"  operate  to  lead  improvident 
people  into  expenditures  and  debt  unjustified  by  their 
incomes  and  station  in  society.  This  point  is  mentioned 
here  because  it  has  an  important  bearing  upon  the 
specific  problems  we  are  about  to  investigate. 

Irrespective  of  the  advantages  or  disadvantages  of 
instalment  sales  to  the  consumer,  from  a  purely  sales 
standpoint  as  a  creator  of  business  the  plan  abundantly 


204  Mail-Order  Instalment  Collections 

justifies  itself.  For  example,  in  selling  a  three-liundred- 
dollar  piano  the  purchaser  is  given  three  years  to  pay, 
and  the  sale  is  made  by  reason  of  the  piano's  being 
delivered  at  once,  to  be  used  and  enjoyed  immediately. 
If  the  purchaser  were  required  actually  to  save  three 
hundred  dollars  over  a  period  of  three  years  before  secur- 
ing possession  of  the  piano,  the  sale  doubtless  would  not 
be  made.  Three  years  is  a  long  time,  and  doubtless  many 
other  uses  would  arise  for  the  fund  set  aside  for  this 
purpose.  Therefore  the  instalment  plan  has  created 
three  hundred  dollars  in  business  by  virtue  of  the  plan 
itself.  Of  course,  some  people  take  advantage  of  the 
instalment  plan  as  a  matter  of  convenience,  but  this 
percentage  is  negligible.  It  is  safe  to  say  that  ninety-five 
per  cent  of  instalment  sales  are  made  to  people  who  could 
not  buy  otherwise. 

Pee-Account  Information 

In  the  collection  of  instalment  accounts  the  well-defined 
rules  and  principles  governing  ordinary  mercantile 
accounts  will  not  hold  good.  The  result  has  been  the 
creation  of  a  new  profession  more  exacting  in  its  require- 
ments, infinitely  more  complicated  in  its  purely  mechani- 
cal features,  and  calling  for  a  keener  insight  into  human 
nature  than  is  required  in  the  ordinary  wholesale  mer- 
cantile lines. 

Mercantile  collections  are  more  or  less  insured  by 
the  credit  department  before  the  account  is  placed  on 
the  books,  whereas  in  the  typical  instalment  business  the 
house  really  does  not  become  acquainted  with  its 
customer  until  credit  has  been  extended  and  the  mer- 
chandise delivered.  A  stranger,  a  thousand  miles  away, 
asks  for  credit  on  a  valuable  and  portable  article. 
According  to  the  orthodox  rules  of  credit,  he  should  be 


Fwndamental  Principles  205 

required  to  furnish  bank  references.  He  should  be  rated 
in  the  mercantile  agency  books,  or  at  the  very  least  should 
be  required  to  furnish  the  signature  of  a  rated  property 
owner  or  merchant  on  his  sales  contract  or  lease.  Yet 
he  is  not  asked  to  do  any  of  these  things.  The  credit 
department  has  perhaps  ascertained  that  there  is  such 
a  person  at  the  address  given,  and  that  (so  far  as  the 
town  marshal,  justice  of  the  peace,  postmaster,  attorney, 
or  whoever  reports  upon  him  knows)  he  is  a  man  of  good 
character.  That  is  sufficient,  and  the  order  is  shipped.  In 
fact,  several  of  the  greatest  instalment  mail-order  con- 
cerns in  the  country  now  make  no  credit  investigation 
whatever,  shipping  thousands  of  dollars'  worth  of  mer- 
chandise each  day  without  an  investigation  or  even  a 
first  payment  down.  Instalment  credits  are  more  or  less 
guess  work  in  any  case,  and  the  theory  is  that  the  credit 
department  will  guess  wrongly  and  refuse  credit  on  a 
sufficient  number  of  perfectly  good  risks  to  make  up  for 
the  loss  that  will  be  incurred  by  the  granting  of  indis- 
criminate credit. 

Peksonality  of  the  Debtor 

Another  factor  entering  importantly  into  the  collection 
of  instalment  accounts,  which  is  more  or  less  a  minor 
consideration  as  regards  wholesale  commercial  collec- 
tions, is  the  personality  of  the  debtor.  The  tjrpical  instal- 
ment purchaser  is  not  usually  a  very  good  business  man, 
though  of  course  there  are  hundreds  of  exceptions  to  the 
rule.  Different  businesses  also  attract  different  classes 
of  instalment  debtors.  While  the  typical  instalment 
purchaser's  conception  of  an  obligation  will  doubtless 
compare  favorably  with  that  of  a  rated  merchant,  still 
his  knowledge  of  ordinary  commercial  practices  and 
usages  is  apt  to  be  rather  rudimentary,  if  not  totally 


20G  Mail-Order  Instalment  Collections 

lacking,  and  this  fact  must  be  kept  carefully  in  mind  in 
all  dealings  with  him. 

Individual  Attention  Extremely  Difficult 

Still  another  consideration  which  has  made  the  collec- 
tion of  instalment  accounts  a  distinct  problem,  is  the 
great  number  of  individual  accounts  which  must  be 
handled  under  one  system.  The  ordinary  wholesale 
mercantile  concern  will  have  a  few  hundred  or  thousand 
accounts,  to  each  of  which  it  is  possible  to  give  personal 
and  individual  attention  in  case  of  delinquency,  whereas 
an  instalment  collection  department  may  have  several 
hundred  thousand  individual  accounts  in  process  of  col- 
lection at  one  time.  On  account  of  the  considerations  set 
forth  in  the  preceding  paragraph,  it  is  desirable  that 
these  accounts  receive  attention  of  a  more  personal  and 
specific  nature  than  the  ordinary  wholesale  account.  As 
the  amount  involved  in  the  ordinary  instalment  account 
would  not  justify  this  (the  average  instalment  seldom 
exceeding  five  dollars)  the  department  must  be  operated 
under  a  rigid  system  which  will  automatically  check  and 
disclose  all  delinquencies  among  its  myriads  of  miits, 
but  still  be  elastic  enough  to  allow  for  any  varia- 
tion or  condition  developed  by  reason  of  its  automatic 
functioning. 

It  has  been  said  that  ''the  personal  touch"  is  extremely 
important  in  collecting.  This  was  said  of  mercantile 
accounts.  From  what  has  been  said  of  the  nature  of 
instalment  accounts  it  will  readily  be  seen  that  it  is  vastly 
more  important  as  regards  these,  but  it  is  impossible  to 
inject  tills  quality  into  the  communications  addressed 
to  a  hundred  thousand  different  people.  Yet  there  are 
ways  and  means  of  attaining  the  appearance  of  this 
desirable  quality,  even  though  the  motive  power  is  purely 


Fundamental  Principles  207 

automatic.  All  these  things  the  efficient  instalment  col- 
lector must  know  how  to  do,  and  in  learning  how  to  do 
them,  as  he  has,  he  has  become  a  specialist  of  a  high 
type,  in  no  way  to  be  classified  with  the  office  man  "who 
also  looks  after  the  collections." 

Three  Factors  in  Instalment  Collection 

In  attempting  to  formulate  rules  or  principles  to 
govern  the  collection  of  instalment  accounts  we  are  at 
once  confronted  with  the  wide  diversity  of  conditions 
which  will  affect  the  policy  of  the  collection  department 
as  regards  the  attitude  of  the  house  to  the  debtor  and 
the  means  to  be  employed  to  effect  or  enforce  collection. 
Three  fundamental  considerations  will  at  once  be  dis- 
closed, which  may  be  stated  as  follows : 

1.  The  financial  responsibility  of  the  debtor, 

2.  The  character  of  merchandise  sold. 

3.  The  method  of  sale. 

These  three  considerations  must  be  kept  firmly  in  mind, 
as  the  specific  problems  of  collection  which  we  will 
examine  and  attempt  to  solve,  drawing  our  deduction  of 
principles  therefrom,  must  first  be  classified  with  due 
regard  to  each  of  the  three,  and  their  relation  to  each 
other — what  is  sold,  to  whom  sold,  and  how  sold. 

When  we  have  gone  thus  far  and  ascertained  the  class 
of  people  we  are  dealing  with,  the  nature  of  the  trans- 
action, etc.,  it  may  seem  that  we  would  have  a  sufficiently 
concrete  foundation  upon  which  to  build  our  collection 
policy.    We  really  have  the  foundation,  but  that  is  all. 

Suppose  we  are  selling  gas  engines  to  farmers  on 
monthly  payments.  We  know  the  character  of  letters  to 
write  to  farmers.  We  have  farmers  in  general  properly 
classified  in  relation  to  other  classes  of  buyers.  Perhaps 
we  have  gone  still  further  and  classified  the  farmers 


208  Mail-Order  Instal^nent  Collections 

tiiemselves,  giving  due  regard  to  the  fact  that  gas  engines 
on  the  farm  denote  progress  and  therefore  we  are  dealing 
with  a  substantial  class  of  business  men.  We  know  how 
the  engines  were  sold ;  what  representations  were  made  as 
to  their  durability,  power,  fuel  economy,  etc.,  and  whether 
or  not  they  will  fulfill  these  promises  under  the  proper 
conditions.  Yet  if  our  house  has  sold  ten  thousand 
engines,  and  we  attempt  to  handle  these  ten  thousand 
accounts  under  a  rigid  blanket  policy  with  regard  to  only 
the  three  considerations  outlined  above,  our  collection 
department  will  be  about  as  successful  as  a  shoe  factory 
which  made  only  number-nine  shoes.  A  few  customers 
would  be  fitted  perfectly,  but  their  expressions  of  satis- 
faction and  commendation  would  be  drowned  amid  the 
remonstrances  and  complaints  of  those  with  pinched  or 
blistered  feet.  As  an  example  of  what  further  facts  must 
be  considered  let  us  take  one  personal  matter,  the  most 
important,  which  will  enter  into  all  instalment  trans- 
actions— the  attitude  of  the  debtor. 

Attitude  of  the  Debtoe 

"We  certainly  cannot  pursue  the  same  policy  with  John 
Jones,  who  has,  or  thinks  he  has,  a  legitimate  complaint, 
as  we  would  with  James  Smith,  who  is  well  satisfied  with 
his  engine,  but  is  prevented  by  circumstances  from  meet- 
ing his  payments  promptly;  or  with  Henry  Brown,  who 
should  not  have  ordered  an  engine  in  the  first  place,  hav- 
ing neither  use  for  the  engine  nor  money  to  pay  for  it; 
or  again  with  William  Black,  who  has  no  intention  of 
paying  at  all  until  forced  to  do  so.  A  moment's  examina- 
tion of  all  the  different  angles  of  the  problem  that 
this  one  consideration  alone  will  create  would  seem  to 
preclude  any  possibility  of  a  really  efficient  and  compre- 


Fundamental  Principles  209 

hensive  system,  yet  the  house  has  sold  ten  thousand 
engines  this  season,  and  plans  to  sell  twenty-five  thou- 
sand next  year,  so  a  start  must  be  made. 

TEST  QUESTIONS 

1.  To  what  extent  does  the  mail-order  instalment  business 
prevail  in  modern  merchandising? 

2.  What  articles,  if  any,  are  marketed  on  the  instalment 
plan  in  your  own  town  or  city? 

3.  How  does  the  volume   of  instalment  business   compare 
with  ''open  account"  business? 

4.  What  are  the  advantages  and  the  objections  to  the  instal- 
ment system  of  merchandising? 

5.  How  does  a  mail-order  instalment  account  differ  from  an 
ordinary  merchandise  account  in  its  inception? 

6.  In  what  important  respects  do  instalment  debtors  often 
differ  from  open-account  debtors? 

7.  What  are  the  three   fundamental   considerations  to  be 
observed  in  handling  instalment  collections? 

8.  How  does  each  factor  affect  the  problem  of  collections? 


CHAPTER  n 

TYPICAL    INSTALMENT    COLLECTION    CASES 

In  order  to  arrive  at  anything  like  specific  solutions  of 
the  various  problems  which  will  confront  an  instalment 
collection  department,  we  must  have  the  specific  problems 
themselves ;  so  we  will  take  a  number  of  typical  examples 
which  will  be  met  with  in  various  lines  of  instalment 
business,  outlining  the  important  complications  which 
may  arise  during  the  process  of  collection.  We  will 
enter  into  these  specific  problems  rather  fully,  assuming 
that  we  are  examining  a  number  of  actual  instalment 
accounts  which  have  just  been  placed  in  the  files  of  col- 
lection departments. 

An  Account  foe  Luxuries 

Henry  Simmons  of  McCook,  Kansas,  brakeman  on  the 
Union  Pacific  Railway,  has  purchased  a  diamond  from 
the  Blank  Jewelry  Company  of  Chicago,  paying  $1.00 
down  and  agreeing  to  pay  $5.00  per  month  until  a  total 
of  $76.00  is  paid.  Simmons'  sales  contract  or  lease  states 
that  title  to  the  diamond  does  not  pass  to  him  until  tlie 
full  purchase  price  is  paid  and  that  if  two  or  more  pay- 
ments become  delinquent,  the  entire  unpaid  balance,  at 
the  election  of  the  seller,  becomes  at  once  due.  Now,  let 
us  examine  the  three  basic  conditions  upon  which  our 
efforts  to  collect  this  account  must  rest : 

1.  The  Financial  Responsibility  of  the  Debtor. — The 
sales  contract  states  that  Simmons  is  twenty-five  years 

210 


Typical  Cases  211 

of  age  and  is  employed  as  a  brakeman.  It  is  therefore 
evident  that  he  can  well  afford  to  pay  the  monthly 
instalment  agreed  upon.  He  is  no  doubt  dependent  upon 
his  monthly  salary,  however,  and  should  this  be  stopped 
for  any  reason  he  probably  would  have  nothing  to  fall 
back  upon.  Another  thing:  he  is  a  railroad  employee 
and  unmarried,  and  should  he  lose  his  position  in  McCook 
he  would  be  obliged  to  go  elsewhere  to  secure  similar 
work ;  an  easy  matter  for  him,  as  his  fellow-workers  will 
carry  him  free  wherever  he  desires  to  go.  It  would  there- 
fore appear  that  the  account  would  be  a  very  satisfactory 
one,  provided  nothing  happens  to  Simmons'  income  or 
position. 

2.  The  Character  of  the  Merchandise  Sold. — The 
merchandise  is  a  diamond,  a  very  valuable  and  easily 
concealed  article.  It  will  not  deteriorate  with  use  and 
can  be  taken  back  by  the  firm,  reset,  and  sold  again  with- 
out loss.  Title  to  the  diamond  does  not  pass  to  Simmons 
until  it  is  paid  for  in  full.  Therefore  every  payment  he 
makes  on  it  increases  his  equity  therein  and  his  reluctance 
to  ,give  it  up.  A  diamond  is  a  luxury,  as  distinguished 
from  a  necessity  of  life.  This  fact  will  have  an  important 
bearing  upon  the  collection  of  the  account  if  trouble 
ensues,  because  the  statutes  of  nearly  every  state  make 
an  important  distinction  between  luxuries  and  necessities. 

3.  The  Method  of  Sale. — Simmons  purchased  the 
diamond  through  the  medium  of  a  magazine  advertise- 
ment. Although  the  advertisement  laid  particular  stress 
upon  the  ease  with  which  the  article  could  be  acquired, 
Simmons  acted  upon  his  own  initiative  in  sending  for  it. 
Although  he  did  not  need  it,  he  really  wanted  the 
diamond.  By  what  mental  processes  he  decided  to  pur- 
chase it  we  do  not  know.  Probably  he  did  not  give  the 
matter  much  thought  himself.    No  doubt  he  had  always 


212  Mail-Order  Instalment  Collections 

considered  diamonds  as  the  outward  manifestation  of 
prosperity  and  had  admired  them  through  the  jeweler's 
window  in  a  rather  impersonal  way,  cataloguing  them 
vaguely  in  the  cargo  of  his  ship  which  would  come  in 
after  he  had  got  around  to  send  it  out.  Or  perhaps  a 
diamond  was  necessary  to  certain  romantic  plans  or  the 
consummation  thereof ;  or  perhaps  it  was  simply  a  grati- 
fication of  the  human  and  universal  desire  for  the 
possession  of  beautiful  things,  hitherto  considered  hope- 
less, and  then  suddenly  rendered  feasible  by  the  offer  of 
*  *  a  dollar  down. ' '  At  any  rate,  his  order  and  a  dollar  are 
received  along  with  a  dozen,  hundred,  or  thousand  similar 
ones,  the  diamond  is  sent,  and  the  account  placed  in  the 
collection-department  files. 

COLLECTION  PROCEDUEE 

A  bill  will  go  out  automatically  to  Simmons  each  month 
(if  payments  are  to  be  made  monthly)  several  days  before 
his  payment  is  due,  and  if  these  bills  are  paid  promptly 
his  account  will  remain  in  an  honorable  obscurity  in  the 
collection  files  until  it  is  paid  in  full.  If  a  remittance  is 
not  forthcoming  within  a  certain  time  after  the  bill  is  sent, 
a  second  one  goes  forward,  followe<I  at  regular  intervals 
(dependent  upon  the  debtor's  distance  from  the  home 
office)  by  a  series  of  form-letters.  These  letters  are 
progressive  in  character,  beginning  with  a  courteous  and 
diplomatic  reminder  of  the  pajTuent  past  due,  and  grad- 
ually increasing  in  insistence  that  Simmons  either  pay 
or  explain  his  failure  to  do  so. 

MISFORTUNE 

Suppose  Simmons  responds  to  our  first  letter  stating 
that  he  has  been  unfortunate.  He  has  lost  his  position, 
has  met  with  an  accident,  or  is  ill.    Shall  we  write  him  a 


Typical  Cases  213 

cold,  business-like  letter,  again  calling  attention  to  the 
delinquent  condition  of  his  account  and  ignoring  his 
explanation!  Hardly.  The  collection  department  now 
becomes  personified  in  the  correspondent,  who  is 
extremely  sorry  to  know  of  Mr.  Simmons'  trouble  and 
trusts  that  the  present  handicap  will  soon  be  overcome, 
and  informs  him  that  under  the  circumstances  an  exten- 
sion of  payments  mil  be  freely  granted. 

The  correspondent  means  just  what  he  writes.  If  he 
is  a  real  collection  correspondent,  the  first  thing  he  has 
learned  is  that  he  is  dealing  with  human  beings,  not 
impersonal  "accounts."  Simmons  discovers  that  he  is 
writing  to  a  real  flesh-and-blood  person  who  understands 
his  case  perfectly  and  who  is  going  to  "take  care  of  him." 
Of  course,  a  subtile  "collection"  touch  may  be  added  to 
the  letter  to  this  effect:  "I  know  you  will  resume  your 
payments  just  as  soon  as  possible,  as  I  should  dislike  to 
see  you  lose  your  diamond  after  paying  so  much  on  it," 
but  still  Simmons  has  received  what  he  needs — human 
understanding  and  sympathy,  and  no  harm  has  been 
done,  even  if  he  is  left  with  the  realization  that  money  is 
still  owing  and  must  eventually  be  paid. 

Too  much  stress  cannot  be  placed  upon  the  importance 
of  this.  If  Simmons  is  out  of  work  or  ill  he  will  experience 
a  financial  setback.  When  he  goes  to  work  again  he  will 
probably  be  more  or  less  in  debt  or  need  a  good  many 
things,  and  the  demands  on  his  purse  will  be  greater  than 
his  income  for  some  time.  The  first  creditors  to  be  paid 
will  be  those  he  wishes  to  pay.  The  diamond  account  is 
under  a  great  handicap  anyway.  His  creditor  is  a 
thousand  miles  away,  whereas  the  landlady  and  the  local 
merchants  are  right  on  the  ground  and  not  to  be  put  off. 
This  brings  us  to  another  important  angle  of  instahnent 


214  Mail-Order  Instalment  Collections 

collections  which  may  be  stated  as  the  discrimination 
against  the  distant  creditor. 

OVERLOADED  WITH  INSTALMENT  ACCOUNTS 

Suppose  Simmons  has  allowed  himself  to  become 
involved  in  debt  through  misfortune  or  carelessness  or 
on  account  of  the  assumption  of  other  obligations. 
Thousands  of  letters  are  received  in  every  large  collection 
department  each  year  from  debtors  stating  that  they 
have  just  purchased  a  home,  must  meet  a  certain  bill,  or 
have  purchased  something  which  must  be  paid  for  within 
a  certain  time,  and  therefore  they  must  have  an  extension 
of  time  or  a  reduction  in  payments. 

If  Simmons  writes  such  a  letter  he  should  be  taken  to 
task  in  a  friendly  but  JBrm  manner.  In  the  first  place  he 
has  no  right  voluntarily  to  assume  obligations  beyond  his 
ability  to  meet,  or  if  these  obligations  have  been  forced 
upon  him  through  sickness  or  misfortune,  he  has  no  right 
to  discriminate  against  certain  of  his  creditors  in  favor 
of  others.  The  amount  he  has  available  to  meet  his 
obligations,  if  less  than  the  amount  required,  should  be 
prorated  among  all  his  creditors  with  equal  justice.  But 
he  does  not  usually  understand  this.  The  Blank  Jewelry 
Company  is  a  more  or  less  impersonal  entity,  a  long 
distance  away,  and  while  he  fully  intends  to  pay  them 
every  cent  he  owes,  still  there  is  nothing  intangible  or 
impersonal  about  the  landlady  and  the  other  local 
creditors.  He  can,  if  he  chooses,  allow  the  wrath  of  the 
Blank  Jewelry  Company  to  remain  sealed  up  in  unopened 
letters,  but  not  the  wrath  of  his  local  creditors ;  therefore 
lie  discriminates. 

Again  he  will  ask  for  an  extension  of  payments  in 
perfect  good  faith,  because  he  has  purchased  something 
else  which  must  be  paid  for  promptly,  ignorant  of  the 


Typical  Cases  215 

injustice  he  is  doing  the  House  and  the  unfairness  of  his 
request.  We  cannot  inform  him  that  we  are  not  con- 
cerned witli  his  personal  affairs,  that  we  have  entered 
into  a  definite  business  arrangement  with  him  and  shall 
expect  kim  to  fulfill  his  part  of  it.  This  is  actually  the 
case,  but  Simmons  must  be  made  to  view  the  situation 
from  the  standpoint  of  the  House  as  well  as  his  own,  and 
a  curt  statement  of  facts  will  simply  make  him  angry,  and 
he  will  take  the  extension  originally  asked  for.  It  is 
much  easier  to  create  an  antagonistic  attitude  on  the  part 
of  a  debtor  than  to  overcome  one.  Therefore  we  must 
patiently  explain  why  such  a  request  is  unjust,  impress- 
ing it  upon  Simmons  that  "we  are  sure  he  will  at  once 
recognize  the  justice  of  our  attitude."  Even  though  cir- 
cumstances are  such  that  he  cannot  continue  his  payments 
promptly,  if  we  have  handled  the  situation  properly,  he 
will  recognize  the  fact  that  he  has  treated  us  rather 
shabbily  and  resolve  to  rectify  his  shortcomings  as 
quickly  as  possible. 

It  will  thus  be  seen  that  we  are  more  or  less  dependent 
upon  Simmons '  good  will,  and  every  effort  possible,  con- 
sistent with  sound  business,  must  be  exerted  to  maintain 
this  attitude  on  his  part ;  not  by  a  weak  and  ready  com- 
pliance with  any  unjust  or  unfair  request  he  may  make, 
but  by  a  diplomatic  and  firm  insistence  upon  as  close  an 
approximation  to  the  original  agreement  as  circumstances 
will  permit.  If  Simmons  is  the  kind  of  man  we  hope  he 
Is,  this  treatment  will  be  successful. 

THE  SLOW-PAY  DEBTOK 

We  will  now  consider  the  Simmons  account  from  the 
standpoint  of  the  ''slow-pay"  debtor.  Suppose  he  is 
something  of  a  spendthrift;  owes  his  entire  salary  check 
before  he  receives  it,  or,  like  so  many  of  his  class,  spends 


216  Mail-Order  Instalment  Collections 

the  first  few  days  of  the  montli  in  lavish  affluence  and  the 
balance  in  poverty.  If  we  could  ''lay  for  him"  outside 
the  pa^Tiiaster  's  window  each  month  we  should  experience 
no  difficulty  in  collecting,  but  remember,  the  impulse  to 
pay  must  be  strong  enough  within  him  to  make  him  buy 
a  stamp  and  a  money  order  and  mail  it. 

Should  Simmons  be  in  this  category,  we  shall  probably 
succeed  in  collecting  from  him  about  every  three  months, 
or  when  he  is  brought  to  a  realization  that  the  patience  of 
the  House  is  exhausted.  He  may  mean  well  enough  but 
simply  be  improvident.  Then  again,  he  may  not  mean 
well  and  may  pay  only  when  he  knows  that  he  must,  in 
order  to  avert  drastic  action.  In  either  case,  it  does  not 
take  long  to  establish  the  fact  that  he  is  ''slow  pay," 
and  when  this  is  once  ascertained  there  is  nothing  to  be 
gained  by  appeals  to  his  honor  and  sense  of  fairness, 
intimations  that  he  is  endangering  his  credit  standing, 
etc.  What  does  he  care  for  these  things?  He  "knows 
the  game"  and  intends  to  take  advantage  of  the  leeway 
given  him  to  the  fullest  extent,  entertaining  the  very 
foolish  but  somewhat  prevalent  idea  that  the  longer  he 
can  evade  payment  the  more  he  will  be  ahead. 

If  Simmons  is  of  this  kind,  he  does  not  need  a  bill  each 
month.  A  letter  to  the  effect  that  "we  regret  to  note  that 
you  have  again  allowed  your  account  to  become  delin- 
quent and  must  request  that  you  favor  us  with  a 
remittance  by  return  mail"  will  not  bring  results.  He 
needs  a  jolt.  Suppose  we  could  actually  see  and  talk  to 
him  for  a  few  minutes.  Our  message  would  be  something 
like  this:  "See  here,  Simmons,  we  are  getting  tired  of 
this  treatment.  You  are  simply  taking  advantage  of  our 
good  nature  and  we  do  not  propose  to  stand  it  any  longer. 
If  you  think  you  can  stall  us  off  month  after  month  you 
are  mistaken.     We  extended  you  credit  in  good  faith, 


Typical  Cases  217 

because  we  thought  you  were  man  enough  to  keep  your 
word.  You  have  the  money.  Now  pay  up,  or  we  will  get 
after  you  in  a  manner  that  will  bring  you  to  time. ' '  This 
is  a  language  that  Simmons  can  understand  (assuming 
that  we  have  him  in  the  proper  category).  Therefore  our 
notice  of  payment  due  should  be  a  stiff  reminder,  followed 
promptly  by  such  a  message  as  the  foregoing. 

Suppose  that  no  payment  has  been  received  on  the 
Simmons  account  for  three  months.  He  has  had  two 
bills  and  seven  or  eight  letters.  Something  is  wrong  at 
McCook.  We  have  appealed,  in  our  form-letters,  to  his 
sense  of  fairness  and  honesty.  He  has  been  admonished 
that  he  is  jeopardizing  one  of  his  most  valuable  assets — 
his  credit;  and  it  has  even  been  hinted  that  drastic 
measures  are  contemplated — all  without  result. 

The  natural  inference  will  be  that  he  is  dishonest,  yet 
this  may  not  be  the  case  at  all,  and  to  act  upou  this 
assumption  might  do  Simmons  a  grave  injustice,  to  say 
nothing  of  placing  the  account  in  jeopardy.  He  may  be 
ill  in  the  hospital  and  his  mail  piling  up  at  his  home.  He 
may  have  lost  his  position  and  left  town  in  search  of 
another,  ordering  that  his  mail  be  held  for  him  until  he 
is  located.  But  we  must  arrive  at  some  comprehensive 
basis  of  procedure  (we  are  handling  from  ten  to  a 
hundred  thousand  accounts,  remember)  and  if  Simmons 
does  not  answer  letters,  he  must  be  classified  as  dishonest 
and  abide  with  ignoble  companions  until  he  clears  him- 
self. If  we  have  misjudged  him,  it  is  his  fault,  and  we 
must  be  skillful  enough  to  make  him  see  this  after  the 
first  flush  of  his  anger  has  passed.  At  any  rate,  if  our 
letters  do  not  come  back  unclaimed  we  must  assume  that 
he  is  receiving  them.  If  we  ask  Simmons  point  blank: 
"Mr.  Simmons,  are  you  an  honest  man  or  a  crook?"  he 
will  either  hasten  to  advise  us  that  he  is  honest,  incidently 


218  Mail-Order  Instalment  Collections 

explaining  his  delinquency,  or  by  his  silence  admit  that 
"our  worst  fears  are  well  founded.  He  has  not  answered 
our  question  and  therefore  we  have  him  classified  as 
dishonest. 

We  now  have  three  methods  of  procedure  open.  We 
may  place  the  account  in  the  hands  of  a  collection  agency, 
or  in  the  hands  of  an  attorney,  or  continue  to  handle  it 
direct.  There  is  still  a  good  chance  that  the  account  may 
be  collected  or  the  diamond  recovered  through  further 
efforts  of  the  collection  department.  It  all  depends  upon 
how  hardened  an  offender  Simmons  is.  Poor  collection 
methods  are  responsible  for  a  large  percentage  of  the 
difficulties  of  this  nature.  He  may  have  beaten  one  or 
two  mail-order  instalment  firms  previously  and  been  led 
to  the  belief  that  he  has  discovered  a  way  to  acquire 
property  without  paying  for  it  and  still  maintain  his 
reputation  in  his  home  town.  In  this  case  publicity  is 
what  he  fears.  Discreet  and  noncommittal  inquiries 
addressed  to  banks,  attorneys,  county  and  town  officials, 
references,  etc.,  will  develop  much  information  regarding 
his  habits,  character,  standing  in  the  community,  etc., 
and  if  he  really  is  posing  as  an  honorable  man,  you  have 
a  weapon  that  he  cannot  resist.  He  does  not  propose 
that  his  friends  and  associates  shall  know  that  his  proudly 
worn  diamond  is  not  paid  for.  Imagine  the  discovery  by 
his  fiancee  that  his  troth  is  plighted  with  a  stolen  ring? 
No,  the  skillful  collector  will  paint  Simmons  a  picture  of 
consequences  that  he  cannot  contemplate  with  indiffer- 
ence. 

If  he  is  indifferent  as  to  his  reputation  in  his  com- 
munity and  has  no  good  name  to  lose,  remaining  silent 
or  pertly  contemptuous  to  all  appeals  to  his  honor  or 
fear,  then  nothing  remains  to  be  done  but  to  recover 


Typical  Cases  219 

the   diamond  by  civil  process,   or  criminal,  if  he   has 
concealed  it. 

FINDING  LOST  DEBTORS 

The  most  exasperating  thing  Simmons  can  do  is  to 
disappear,  leaving  no  forwarding  address.  He  then 
becomes,  in  the  parlance  of  the  collection  department,  "a 
skip,^'  and  must  be  found  by  whatever  ingenious  methods 
may  suggest  themselves.  We  shall  not  have  much 
difficulty  in  tracing  Simmons,  provided  he  does  not  become 
a  vagabond,  because  he  lived  in  a  small  town  where  he 
was  comparatively  well  known.  He  was  an  employee  of 
the  railroad  and  will  no  doubt  seek  employment  elsewhere 
in  the  same  line  of  work.  He  will  ride  free  with  friends 
to  the  end  of  the  di^dsion,  and  there  be  turned  over  to 
other  employees  as  a  brother  trainman,  and  so  he  will 
leave  a  broad  trail  to  his  destination. 

Ordinarily  one  '* locate  letter"  will  find  him.  This 
letter  will  be  in  the  nature  of  a  decoy,  signed  by  an 
individual  and  sent  from  a  different  address  from  that  of 
the  firm  (preferably  from  a  different  town).  It  will  be 
addressed  by  title  to  the  ofiicial  who  was  immediately 
over  Simmons  and  state  that  the  writer  is  extremely 
desirous  of  getting  in  touch  with  Mr.  Simmons  for  the 
purpose  of  imparting  some  important  information  and 
will  request  the  co-operation  of  the  official  addressed, 
containing  a  stamped  envelope  for  reply.  While  the  letter 
will  be  noncommittal,  an  inference  will  be  given  that  the 
writer  has  information  that  will  be  advantageous  to 
Simmons,  and  the  stamped  envelope  puts  the  official 
under  something  of  an  obligation  to  reply.  It  is  more 
than  likely  that  the  official  will  know  where  Simmons  has 
gone,  or  will  be  in  a  position  to  ascertain  this  by  a  few 


220  Mail-Order  Instalment  Collections 

inquiries  among  his  former  associates,  and  the  informa- 
tion will  be  forthcoming. 

We  will  assmne  that  we  have  found  Simmons  at  his 
new  address.  Shall  we  accuse  him  of  trying  to  evade  his 
obligation  and  allow  a  note  of  braggadocio  over  our 
cleverness  in  finding  him  to  creep  into  our  letter?  We 
had  better  not,  unless  a  long  period  of  time  has  elapsed 
since  his  disappearance  and  circumstances  seem  to 
indicate  that  he  has  tried  to  cover  up  his  trail.  If  he  has 
been  found  without  difficulty  and  the  account  is  not 
seriously  delinquent,  ordinarily  a  ''reminder"  sent  to 
his  new  address,  with  no  reference  to  the  change,  will 
produce  results,  as  it  will  impress  upon  him  the  fact  that 
his  creditor  is  not  asleep.  Besides,  this  will  give  him  the 
benefit  of  the  doubt,  to  which  he  is  entitled.  Perhaps  he  is 
out  of  employment  or  has  met  with  extraordinary  expense 
in  connection  with  his  removal,  etc.,  and  he  may  have  fully 
intended  to  take  care  of  his  payments  just  as  soon  as 
circumstances  would  permit.  At  any  rate,  we  know 
where  he  is,  and  thus  one  difficulty  has  been  removed. 
Had  the  specific  method  of  locating  Simmons  given  above 
failed,  we  should  still  have  many  avenues  of  research 
open,  one  of  which  at  least  would  surely  lead  to  results. 

The  tracing  of  "skips"  is  one  of  the  most  interesting 
and  difficult  phases  of  the  collection  of  instalment 
accounts,  and  before  going  forward  with  the  examination 
of  another  account,  we  will  digTess  here  and  discuss  the 
subject  of  finding  lost  debtors  somewhat  at  length. 

Suppose  a  debtor  disappears  from  a  small  town  leaving 
no  easily  followed  trail.  We  know  nothing  about  him, 
having  merely  his  name  and  last  address.  We  will  fire  a 
broadside  and  address  decoy  ''locates"  to  the  post- 
master, city  clerk,  chief  of  police,  justice  of  the  peace, 
and  "occupant"  of  the  debtor's  last  street  address,  if 


Typical  Cases  221 

he  had  one.  If  there  is  a  street  address,  we  may  go  still 
further  and  address  "locates"  to  ''next  door."  By  next 
door  is  meant  the  next  lower  and  higher  numbers  but 
one.  For  instance,  debtor  lived  at  441  23rd  street.  Next 
door  on  either  side  will  be  439  and  443.  440  and  442 
will  be  directly  across  the  street.  Small  town  officials 
are  not  proverbially  overworked,  and  someone  will  take 
the  trouble  to  answer  the  letter  with  the  desired  informa- 
tion. Postmasters  are  not  allowed  to  furnish  such 
information,  but  at  least  50  per  cent  will  do  so,  either  in 
their  private  capacities  or  through  ignorance  of  the  regu- 
lation. A  registered  letter  will  find  the  debtor  if  he  has 
left  a  forwarding  address,  as  the  receipt  mil  come  back 
from  the  town  where  the  letter  is  delivered.  Often  a 
postmaster  will  state  that  he  cannot  give  the  desired 
information  but  that  he  has  a  forwarding  address.  A 
registered  letter  will  then  serve  to  clear  up  the  mystery. 
Town  and  county  officials  will  often  give  valuable 
information,  even  though  the  present  address  is  not 
forthcoming.  Often  the  chief  of  police  will  reply  that 
he  too  is  looking  for  the  person  in  question,  or  the 
"occupant"  will  bewail  an  unsettled  board  or  rent  bill. 
This  is  usually  the  signal  to  charge  off  the  account, 
because  no  "locating"  system  can  keep  up  with  a  fugitive 
from  the  law. 

A  married  man  living  in  a  small  city  or  town  will  find 
it  practically  impossible  to  place  himself  beyond  the 
reach  of  the  vigilant  collector.  Unless  he  decamps 
between  two  suns,  his  contemplated  removal  will  have 
been  discussed  by  members  of  the  family  and  by  them 
with  neighbors  and  friends.  It  is  safe  to  say  that  the 
small-town  "skip"  does  not  move  in  order  to  evade  his 
debts  but  rather  seizes  the  circumstance  to  get  out  from 
under  an  annoying  obligation  against  the  payment  of 


222  Mail-Order  Instalment  Collections 

which  he  hafe  no  just  defense.  In  this  particular  he  differs 
from  his  city  brother  "skip,"  who  is  often  a  professional 
"disappearer,"  and  who  from  experience  and  circum- 
stances is  able  to  cover  his  trail  as  cleverly  as  an  Indian. 

To  return  to  our  married  man:  his  wife  or  children 
have  doubtless  told  the  neighbors  where  they  are  going 
and,  being  human,  these  neighbors  are  willing,  nay 
anxious,  to  impart  whatever  information  they  may  have. 
Therefore  if  we  send  "locate"  letters  to  several  next- 
door  occupants,  we  stand  a  very  good  chance  of  getting 
results.  "We  may  of  course  be  addressing  a  certain  per- 
centage of  vacant  lots,  but  a  few  misses  must  be  expected 
and  taken  into  consideration.  These  letters  should  be 
skillfully  written,  stating  simply  that  the  writer  has  a 
matter  of  importance  to  communicate  to  Mr.  Blank, 
formerly  residing  at  the  given  number,  or  has  important 
information  to  convey  to  him,  and  would  deem  it  a  great 
favor  if  the  person  addressed  would  give  him  information 
as  to  his  present  address  inclosing  a  stamped  addressed 
envelope  for  this  purpose. 

Some  of  the  replies  to  these  next-door  "locates"  are 
exceedingly  interesting  from  the  insight  they  give  into 
human  nature.  Almost  without  exception  curiosity  and 
a  desire  to  "tattle"  will  be  the  dominant  motives  of  the 
replies.  In  many  cases,  if  the  address  is  not  known,  other 
information  will  be  furnished  which  will  serve  almost  as 
well.  For  instance,  after  regretting  his  or  her  inability 
to  supply  the  address  desired,  the  party  addressed  will 
volunteer  the  information  that  "Mr.  Blank  has  a  married 
sister  by  the  name  of  Smith  living  at  a  certain  address — 
that  he  originally  came  from  Blanktown  'where  his  folks 
live,'  "  or  other  information  of  this  character,  to  say 
nothing  of  every  sort  of  gossip  relating  to  Blank's  habits, 


Typkal  Cases  223 

reputation,  antecedents,  and  behavior,  all  of  which  is 
grist  for  the  collector's  mill. 

One  instalment  furniture  house  gets  good  results  in  a 
great  number  of  cases  by  decoy  letters  to  station  agents 
in  small  towns  asking  the  destination  of  Mr.  Blank's 
shipment  of  household  goods.  Another  house  uses  a 
"puncher  draft"  with  good  results  in  small  towns:  the 

drafts  being   returned  indorsed   "gone   to  "   or 

"send  to  bank  at  ."     A  "puncher  draft"  is  not 

subject  to  protest  and  is  sent  direct  instead  of  through  a 
local  bank.  Country  banks  are  becoming  annoyed  with 
these  drafts,  however,  and  a  great  many  will  not  return 
the  unpaid  draft  unless  from  ten  to  twenty-five  cents  is 
remitted  to  cover  their  expense.  Many  banks  will  not 
even  present  such  a  draft  unless  accompanied  by  a  fee, 
as  not  enough  of  them  are  paid  to  make  the  trouble  of 
presenting  worth  while.  Another,  but  more  expensive, 
method  is  to  insert  an  advertisement  in  the  classified 
columns  of  a  local  paper,  although  most  of  the  replies  to 
this  will  be  in  the  nature  of  inquiries  as  to  what  the 
advertiser  wishes  the  address  for,  or  "how  much  there 
is  in  it"  for  the  supplier  of  the  desired  information. 

These  expedients  adopted  to  find  a  debtor  who  has 
disappeared  from  a  small  town  or  ^dllage  will  not  do 
at  all  when  the  debtor  originally  resided  in  a  city.  Small- 
town citizens,  while  perhaps  no  more  gossipy  than  those 
of  large  cities,  have  greater  facilities  for  acquiring 
information  regarding  their  neighbors  and  to^^^lspeople. 
From  two  to  fifty  families  may  live  in  a  flat  or  apartment 
building  in  a  city  for  a  year  and  still  be  absolute  strangers 
to  one  another.  A  family  will  move  into  a  neighborhood 
or  building,  nobody  knowing  or  caring  whence  they  come, 
and  the  same  indifference  will  mark  their  departure.  It 
is  therefore  useless  in  most  cases  to  query  the  neighbors, 


224  Mail-Order  Instahnent  Collections 

as  the  ''occupant"  probably  never  heard  of  the  family 
who  preceded  him,  and  "next  door"  on  either  side  may 
be  a  ten-story  apartment  building  housing  any  number  of 
families. 

The  "locator"  therefore  finds  it  a  difficult  task  to  find 
a  city  ' '  skip. ' '  This  fact  is  taken  into  consideration  when 
the  account  is  opened,  and  particular  stress  is  laid  on 
having  the  name  of  the  employer  furnished,  together  with 
two  or  more  references.  If  remittance  is  made  by 
personal  check,  the  name  of  the  bank  is  carefully  noted 
for  future  reference.  If  the  stationery  of  the  employer 
or  that  of  any  fraternal  or  social  organization  is  used  in 
sending  in  the  order,  or  in  remitting,  this  is  also  noted. 
This  information  and  the  aid  of  the  registered  letter 
failing,  about  the  only  thing  left  to  do  is  to  employ  the 
professional  "skip-tracer."  As  a  great  majority  of 
disappearances  are  city  accounts,  the  tracing  of  them  has 
become  something  of  a  profession  or  business.  City 
papers  usually  carry  help-wanted  advertisements  for 
skip-tracers,  as  they  form  an  important  adjunct  of  the 
city  instalment-house  collection  department.  Collection 
agencies  usually  employ  these  tracers  and,  all  other 
expedients  failing,  the  best  thing  to  do  is  to  place  the 
account  in  the  hands  of  a  reliable  agency  in  the  city  where 
the  debtor  was  last  heard  from.  If  the  account  justifies, 
they  will  make  a  house-to-house  canvass  in  the  neighbor- 
hood and  also  interview  the  merchants  in  the  debtor's 
late  shopping  district,  picking  up  bits  of  information 
here  and  there  which  will  eventually  serve  to  trace  him. 

The  larger  mail-order  instalment  houses,  handling 
thousands  of  accounts  annually,  usually  succeed  in  work- 
ing out  something  of  a  comprehensive  tracing  system 
which  will  answer  for  the  majority  of  accounts,  but 
careful  individual  attention  must  be  .given  to  a  large 


Typical  Cases  225 

number.  This  work  requires  a  high  degree  of  ingenuity, 
knowledge  of  human  nature,  and  imagination.  The 
results  of  a  rigid  system  of  tracing  are  sometimes 
amusing,  if  not  startling,  and  a  few  examples  may  prove 
of  interest. 

A  customer  of  a  Chicago  concern  living  in  a  little  town 
in  Arizona  allowed  his  account  to  become  lamentably 
delinquent  and  no  response  could  be  secured  from  him. 
The  correspondent  in  charge  of  the  account  gained  the 
impression  that  the  debtor  might  have  moved  and  the 
local  post  office  been  delinquent  with  regard  to  returning 
unclaimed  mail  (one  of  the  failings  of  small  post  offices). 
He  therefore  marked  '^locates"  on  the  account  and,  in 
conformity  with  the  system, ' '  locate ' '  letters  were  sent  to 
the  postmaster,  city  clerk,  chief  of  police,  and  justice  of 
the  peace.  Back  came  a  letter  from  the  debtor  himself, 
inclosing  a  remittance  and  apolo,gizing  for  his  delin- 
quency, stating  that  he  had  been  so  busy  with  his  store 
and  cattle  ranch  that  he  had  been  forced  to  neglect  many 
matters,  incidentally  remarking  that  the  letters  addressed 
to  the  various  officials  had  all  reached  him  safely,  as  all 
these  important  functions  were  centered  in  himself. 

Through  an  error  this  same  house  sent  a  decoy  letter 
to  the  city  clerk  of  Detroit,  Mich.  (Such  letters  should 
never  be  sent  to  officials  of  cities.)  The  city  clerk  took 
the  inquiry  in  good  faith,  believing  it  a  genuine  personal 
one,  and  placed  an  advertisement  in  the  Detroit  papers 
stating  that  John  Jones,  of  Berwyn,  111.,  (a  suburb  of 
Chicago)  was  desirous  of  getting  in  touch  with  Jim 
Smith,  formerly  of  Detroit,  as  he  had  some  important 
information  to  impart.  Jim  Smith  wrote  to  John  Jones, 
of  Berwyn,  who  was  an  employee  of  the  House,  from  away 
out  in  Western  Canada,  saying  that  he  had  read  the 
advertisement  and  that  if  Jones  had  any  money  for  him 


226  Mail-Order  Instalment  Collections 

he  was  to  send  it  at  once,  gi\T.ng  his  address  and  a  great 
amount  of  information  regarding  himself,  so  that  Mr. 
Jones  would  have  no  difficulty  in  ascertaining  that  he 
was  in  touch  with  the  right  Jim  Smith.  Smith  probably 
does  not  know  to  this  day  why  Mr.  Jones  did  not  answer 
his  letter,  and  why  the  house  he  was  trying  to  beat 
swooped  down  upon  him  without  warning  and  threatened 
to  blast  his  new  career  unless  he  settled. 

A  tearful  letter  was  received  by  this  same  employee 
from  a  young  lady  in  San  Francisco,  saying  she  had  heard 
that  he  was  searching  for  John  Doe,  and  explaining  that 
she  was  engaged  to  marry  said  John  Doe  the  following 
week,  and  if  Mr.  Jones  knew  anything  to  the  discredit 
of  John  Doe,  or  knew  any  reason  why  she  should  not 
marry  him,  for  goodness'  sake  to  let  her  know  before  it 
was  too  late.  Needless  to  say,  the  young  lady  was 
reassured  promptly,  and  the  now-located  John  Doe 
admonished  that  he  should  start  his  married  life  with  a 
clear  record. 

An  Accouitt  for  Necessities 

Having  discussed  the  account  of  Henry  Simmons 
somewhat  at  length  and  described  some  of  the  many 
vicissitudes  that  may  affect  the  collection  thereof,  we 
must  examine,  briefly  this  time,  several  other  instalment 
accounts  of  a  somewhat  dissimilar  nature  before  attempt- 
ing to  establish  principles  to  govern  the  collection  of  such 
accounts  in  general. 

George  Ryan,  of  Cairo,  111,,  avails  himself  of  the 
generous  offer  of  the  Golden  Rule  Outfitting  Company, 
of  Chicago,  to  "clothe  him  from  head  to  foot  for  a  dollar 
a  week."  Ryan^s  financial  responsibility  is  similar  to 
that  of  Henrj'  Simmons.  It  might  appear  that  Ryan 
should  be  able  to  secure  credit  for  a  suit  in  his  own  town 


Typical  Cases  227 

and  that  his  sending  to  Chicago  for  it  would  be  evidence 
that  he  could  not,  and  therefore  was  a  poor  credit  risk. 
This  does  not  follow,  however.  There  is  a  subtle 
fascination  a.bout  buying  by  mail  from  a  large  citj'',  and 
while  Eyan  probably  could  do  as  well  in  his  local  stores, 
still  he  would  rather  have  the  moral  satisfaction  of 
wearing  big-city  clothes. 

The  important  distinction  between  the  Ryan  and 
Simmons  accounts  which  would  modify  our  whole  line  of 
endeavor  however,  should  the  account  *'go  bad,"  would 
be  in  the  nature  of  the  merchandise.  Simmons '  diamond 
is  just  as  valuable  as  it  was  when  he  purchased  it,  whereas 
a  day  after  Ryan  dons  his  suit  it  has  no  value  whatever, 
except  what  it  would  bring  as  junk.  Therefore  we  cannot 
threaten  to  recover  the  merchandise  under  any  circum- 
stances.   We  should  probably  succeed  only  too  well. 

From  the  legal  standpoint  our  position  is  much 
stronger,  for  the  suit  is  a  necessity  of  life  and  the  diamond 
is  not.  In  this  particular  transaction,  it  being  an  Illinois 
account,  if  Ryan  is  a  single  man  we  can  garnishee  his 
entire  salary.  If  he  is  a  married  man  his  exemption  is 
but  fifteen  dollars  a  week,  and  if  he  is  inclined  to  be 
dilatory  or  defiant,  collection  may  be  easily  enforced, 
provided  he  is  employed.  These  favorable  collection  laws 
do  not  exist  in  the  majority  of  the  states,  but  most 
states  do  recognize  the  distinction  between  luxuries  and 
necessities,  and  as  a  general  rule  it  is  much  easier  to 
enforce  collection  for  a  suit  of  clothing  than  for  a 
diamond. 

Another  important  factor  will  be  the  amount  of  the 
account.  Ryan's  balance  is  much  smaller  than  Simmons*, 
and  his  willingness  to  complete  payments  will  be  in 
inverse  ratio  to  that  of  Simmons,  because  the  suit  is 
rapidly  deteriorating,  and  unless  he  has  been  rigidly  held 


228  Mail-Order  Instalment  Collections 

to  the  performance  of  his  promise  the  suit  may  be  worn 
out  before  it  is  paid  for.  Therefore  we  must  be  much 
more  strict  with  Ryan  than  with  Simmons,  always  remem- 
bering, however,  that  we  are  dealing  with  a  human  being 
whose  friendship  is  worth  cultivating.  Another  thing, 
Simmons  will  buy  but  one  diamond,  whereas  Ryan  may 
buy  many  suits. 

A  Woman  's  Account 

Mrs.  James  Smith  has  purchased  a  vacuum  cleaner 
from  the  Household  Utilities  Company  of  Chicago  for 
$36,  payable  $3  per  month.  If  this  account  "goes  bad," 
the  chances  are  that  the  family  has  met  with  financial 
reverses  or  some  other  legitimate  obstacle  has  been 
encountered.  In  this  case  the  procedure  is  clearly 
indicated  in  the  Simmons  transaction.  Perhaps  no 
modifications  will  be  necessary  in  case  Mrs.  Smith  proves 
to  be  "  slow  pay. ' ' 

About  the  only  distinction  we  must  recognize  is  that 
Mrs.  Smith  is  apt  not  to  be  as  frank  as  we  should  wish 
in  explaining  her  delinquency.  Simmons  and  Ryan  will 
be  quick  to  plead  poverty,  whereas  Mrs.  Smith  is  more 
apt  to  find  fault  with  the  machine  in  order  to  justify  her 
failure  to  fulfill  her  promises.  Of  course,  such  a  com- 
plaint cannot  be  overlooked,  nor  can  we  call  the  lady's 
attention  to  the  fact  that  she  has  used  the  machine  for 
six  or  eight  months  with  apparent  satisfaction,  as 
evidenced  by  her  former  prompt  payment,  and  accuse  her 
of  insincerity.  Without  any  intention  on  the  writer's 
part  to  criticize  feminine  business  logic  and  ethics,  the 
statement  is  made,  purely  as  a  personal  opinion,  that  a 
woman  will  fight  harder  and  longer  for  a  mistaken 
principle  and  hold  an  untenable  position  with  more 
fortitude  and  determination  than  a  man  will.    We  cannot 


Tijpical  Cases  229 

write  Mrs.  Smith  that  we  do  not  believe  her  statement 
that  the  cleaner  will  not  clean  and  suggest  that  perhaps 
tiie  trouble  is  a  lack  of  money.  Simmons  might  write  that 
his  diamond  no  longer  glittered  and  Ryan  might  complain 
that  his  suit  was  becoming  wrinkled.  We  could  reply  to 
either  of  them  by  pointing  out  that  their  complaints  were 
ridiculous  and  admonishing  them  to  be  sincere  \\'ith  us 
if  they  expected  the  same  treatment  from  the  House,  but 
with  Mrs.  Smith  we  must  be  diplomatic  and  solicitous, 
making  inquiry  as  to  the  exact  nature  of  the  trouble,  and 
offering  to  make  any  necessary  repairs  or  adjustments, 
or  even  to  replace  the  machine  if  necessary,  incidentally 
ignoring  the  financial  phase  of  the  matter  for  the  time 
being. 

Should  Mrs.  Smith's  actions  prove  that  she  is  not 
acting  in  good  faith,  the  same  motive  indicated  above, 
i.  e.  pride,  will  prove  a  powerful  weapon  against  her. 
No  doubt  the  new  vacuum  cleaner  has  been  shown  to 
neighbors  and  friends  and  pretty  generally  discussed 
throughout  the  neighborhood,  nothing  having  been  said, 
of  course,  regarding  the  '' easy-payment"  feature.  As 
with  all  new  and  unusual  things,  its  virtues  have  been 
extolled  by  its  new  owner,  practical  demonstrations  in 
the  home  .given,  and  a  good  deal  of  satisfaction,  congrat- 
ulation, enw,  etc.,  expressed.  Now,  if  it  comes  to  a 
question  of  Mrs.  Smith  and  the  cleaner  parting  company, 
she  will  find  this  fact  rather  embarrassing  to  explain, 
particularly  so  if  a  '  *  brass  band ' '  accompanunent  is  sug- 
gested by  judicious  reference  to  "constables,"  ''writs  of 
replevin,"  ''summonses,"  "attachments,"  etc.,  in  the 
collection  letters.  These  terms  smack  too  much  of  pub- 
licity to  suit  her,  for  it  does  not  take  a  very  lively 
imagination  to  picture  the  cleaner  carried  through  the 
front  yard  by  a  uniformed  minion  of  the  law,  loaded  into 


230  Mail-Order  InstcU^nent  Collections 

a  wagon,  and  carted  away,  all  before  the  prying  eyes  of 
whilom  admiring  friends  and  neighbors.  In  conclusion 
let  it  be  said,  however,  that  Mrs.  Smith  will  probably  pay 
for  her  vacuum  cleaner,  sewing  machine,  kitchen  cabinet, 
or  whatever  she  buys,  much  more  readily  and  conscien- 
tiously than  will  Simmons  or  Ryan  for  their  purchases. 

A  Business  Man.  's  Account 

Mr.  Charles  Brainerd,  successful  business  man  of 
Omaha,  Neb.,  has  purchased  a  home  billiard  table  of  the 
Black  and  White  ^Mfg.  Go.  of  New  York,  agreeing  to  pay 
one  hundred  dollars  at  five  dollars  per  month.  Mr. 
Brainerd  is  perfectly  able  to  pay  cash  and  secure  the 
discount,  but  he  did  not  care  to  do  this  before  seeing  the 
table,  and  therefore  ordered  it  in  accordance  with  the 
terms  outlined  in  the  advertisement.  The  chances  are 
that  he  will  send  his  check  for  the  entire  amount  if  the 
table  proves  satisfactory,  but  suppose  he  does  not,  and 
also  neglects  the  monthly  pajTnents? 

While  such  accounts  are,  of  course,  gilt-edged  as 
regards  ultimate  pa^onent,  from  the  collection  man's 
standpoint  they  are  the  most  exasperating  of  all.  Five 
dollars  each  month  is  a  big  factor  to  Simmons  and  Eyan, 
bigger  perhaps  than  one  hundred  dollars  is  to  Brainerd, 
while  five  dollars  to  Brainerd  is  so  small  a  consideration 
that  he  overlooks  it  entirely.  He  perhaps  intends  to  pay 
cash,  but  thinks  that  inasmuch  as  Black  &  White  offered 
him  nearly  two  years  in  which  to  complete  pajTnents  for 
the  table,  they  can  well  afford  to  wait  six  or  eight  months 
or  even  a  year  for  pajnnent  in  full. 

The  bills  and  letters  perhaps  come  to  his  home  instead 
of  his  office.  He  has  no  facilities  for  handling  corre- 
spondence at  home,  and  so  they  are  put  aside  or  remain 
in  his  pocket,  to  be  discovered  only  at  such  times  as  his 


Typical  Cases  231 

check  book  or  a  stamp  is  not  available.  We  cannot  accuse 
Brainerd  of  dishonesty,  nor  do  we  wish  to  recover  the 
table.  Therefore  there  is  nothing  to  do  but  ding-dong 
away  month  after  month  until  the  happy  day  arrives 
when  our  letter,  Brainerd 's  impulse  to  pay,  and  his  check 
book  synchronise.  Often  some  ingenious  or  humorous 
inclosure  with  a  bill  will  produce  results,  or  a  draft  sent 
to  his  business  addre&s  will  get  the  money  when  every- 
thing else  has  failed. 

TEST  QUESTIONS 

1.  Explain  the  Simmons  account  from  the  three  angles  by 
which  mail-order  instalment  accounts  are  judged. 

2.  What  is  the  collection  procedure  where  the  debtor  meets 
with  misfortune? 

3.  Explain  "the  discrimination   against  the   distant  cred- 
itor." 

4.  Explain  the  various  possibilities  of  handling  the  over- 
loaded debtor. 

5.  What  are  the  causes  that  produce  a   slow-pay  debtor? 
How  is  each  cause  to  be  dealt  with? 

6.  What  means  are  used  by  the  mail-order  instalment  col- 
lector to  locate  a  lost  debtor? 

7.  What  is  a  "skip"? 

8.  What  is  meant  by  the  term  "locator"  as  used  in  this 
work? 

9.  What  is  a  puncher  draft  ?    How  is  it  used  ? 

10.  What  difference  does  it  make  from  the  collector's  point 
of  view  whether  an  account  is  for  luxuries  or  for  necessities? 

11.  What  special  points  are  to  be  considered  in  accounts  with 
women  ? 

12.  What    are    some    of    the    special    difficulties    sometimes 
encountered  in  a  business  man's  instalment  accounts? 


CHAPTER  III 
psychology  of  the  instalment  debtor 

Abusive  Letters 

A  debtor  who  had  allowed  his  account  to  become  six 
months  delinquent  took  offense  at  a  peremptory  form- 
letter  demanding  payment,  and  wrote  the  House  an 
extremely  abusive  letter.  After  he  had  taken  time  to 
think  the  matter  over  he  saw  the  injustice  of  his  action 
and  realized  that  he  had  violated  one  of  the  first  rules  of 
business  ethics.  So  he  sat  do^\^l  and  wrote  a  courteous 
letter,  explaining  his  delinquency  satisfactorily  (from  his 
standpoint)  and  apologized  for  writing  the  previous 
letter. 

His  first  letter,  however,  made  the  collection  corre- 
spondent so  angr}^  that  he  threw  discretion  to  the  winds 
and  wrote  the  debtor  a  scathing  letter  that  went  him  one 
better  on  all  points.  Immediately  afterwards  the  second 
letter  was  received,  but  when  the  correspondent's  letter 
reached  the  debtor  he  simply  blew  up  and  the  account 
blew  up  with  him.  He  did  not  stop  to  reason  that  he  was 
responsible  for  the  quarrel  and  under  the  ancient  rule  of 
*'an  eye  for  an  eye"  deserved  all  he  got,  nor  did  he  take 
into  consideration  the  fact  that  his  second  letter  had  not 
reached  its  destination  before  the  reply  to  his  first  letter 
was  written.  He  simply  knew  that  he  had  received  an 
insulting,  abusive  letter  which  justified  his  own  letter, 
and  the  quarrel  was  on. 

232 


Psychology  of  Instalment  Debtor  233 

The  loss  of  this  account  was  directly  attributable  to  the 
fault  of  the  correspondent.  In  the  first  place,  an 
intelligent  person  never  writes  an  insulting  or  abusive 
letter.  It  is  therefore  to  be  assumed  that  the  man  who 
does  write  one  is  not  intelligent,  and  this  fact  should  be 
taken  into  consideration  when  a  reply  is  drafted.  By 
answering  such  a  letter  in  kind  the  correspondent  places 
himself  exactly  upK)n  the  same  level  with  his  antagonist 
and  he  must  fight  him  with  his  own  weapons,  which  is  a 
disastrous  thing  to  do.  In  most  cases  one  who  writes  an 
abusive  letter  soon  regrets  it.  Anger  cools  long  before 
the  letter  can  reach  its  destination,  and  knowing  himself 
to  be  in  the  wrong,  the  author  awaits  with  considerable 
trepidation  (perhaps  subconscious)  the  result  of  his 
broadside.  If  he  gets  a  reply  couched  in  courteous 
language,  expressing  surprise  that  he  has  felt  it  necessary 
to  write  such  a  letter,  and  adding  that  inasmuch  as  it 
was  evidently  written  in  anger  it  will  be  overlooked,  he 
feels  that  he  has  been  guilty  of  a  foolish,  ungentl^manly 
action,  whether  he  admits  it  or  not,  and  his  position  has 
been  materially  weakened. 

Of  course,,  such  letters  must  be  met  with  a  firm  intima- 
tion that  they  accomplish  nothing  and  that  the  question 
at  issue  still  remains  to  be  settled,  but  the  entire  matter 
must  be  so  handled  as  to  impress  it  upon  the  mind  of 
the  debtor  that  he  is  doing  business  with  gentlemen  and 
business  men  who  consider  it  beneath  their  dignity  to 
enter  into  a  fishwife's  quarrel  with  him.  There  is  a 
certain  type  of  debtor  that  is  habitually  quarrelsome  and 
abusive  and  will  mistake  courtesy  for  weakness.  Such  a 
debtor  must  be  made  to  understand  that  missives  of  this 
kind  will  not  be  tolerated  and  that  the  courts  of  the  land 
and  the  postal  regulations  offer  a  recourse  against  such 
practices.    Let  it  be  said,  however,  that  the  abusive  debtor 


234  Mail-Order  Instalment  Collections 

represents  but  a  very  small  class  among  debtors  in 
general,  and  in  the  hands  of  a  skillful  correspondent  he 
does  not  present  any  difficulties  that  are  insurmountable. 

Extensions 

What  is  perhaps  the  most  serious  problem  confronting 
the  collection  department  is  the  matter  of  extensions  of 
I>ayments.  In  the  collection  department  of  a  Chicago 
mail-order  instalment  concern,  doing  a  business  of  several 
million  dollars  annually,  it  was  found  that  but  15 
per  cent  of  accounts  were  paid  exactly  in  accordance  with 
the  terms  of  the  sales  agreement.  Eighty-five  per  cent 
lagged  behind  at  some  period,  and  this  delinquency  was 
seldom  made  up.  It  can  readily  be  seen  that  delin- 
quencies on  the  part  of  debtors  may  seriously  affect  the 
revenues  of  the  House,  and  tlierefore  every  effort  should 
be  made  to  induce  prompt  payments  as  they  fall  due.  In 
the  examination  of  the  Simmons  account  this  matter  was 
discussed  somewhat  at  length,  but  the  subject  of  exten- 
sions needs  careful  examination,  as  it  is  the  commonest 
and  most  important  problem  that  will  be  met  with  in  the 
instalment  collection  department.  We  mil  therefore 
follow  the  subject  a  little  further. 

A  debtor  asks  for  an  extension  either  because  he  needs 
it  or  because  he  thinks  he  can  get  it,  and  it  is  the  duty 
of  the  correspondent  to  decide  or  find  out  the  true  reason 
for  the  request.  A  too  liberal  policy  in  the  gTanting  of 
extensions  will  create  a  class  of  debtors  who  know  that 
they  need  only  ask  for  one,  two,  or  three  months'  extension 
to  get  it,  and  jibuse  the  privilege,  whereas  a  too  strict 
policy  will  create  antagonism  and  result  in  a  large  number 
of  controversies.  A  debtor  who  is  refused  an  extension 
is  very  apt  to  take  it  anyway  unless  the  matter  is  handled 
with  a  good  deal  of  diplomacy. 


Psychology  of  Instalment  Debtor  235 

About  the  only  safe  way  is  to  explain  to  the  debtor  that 
the  goods  have  been  sold  to  him  at  a  very  close  price  on 
greatly  extended  payments  with  the  distinct  understand- 
ing that  these  would  be  forthcoming  promptly  and  that 
it  will  work  a  hardship  on  the  House  if  they  are  not ;  in 
other  words,  explain  the  House's  side  of  the  transaction 
and  show  the  debtor  wherein  it  is  his  duty,  in  considera- 
tion of  full  justice  to  his  creditor,  that  he  do  all  he  can  to 
live  up  to  his  promises.  BUT  it  should  be  added  that 
it  is  not  the  policy  of  the  House  to  subject  its  customers 
to  inconvenience,  and  if  the  extension  requested  is 
absolutely  necessary,  the  House  is  willing  to  be  incon- 
venienced in  its  spirit  of  service  to  him.  Then  if  he  takes 
the  extension  it  will  be  in  the  nature  of  a  favor  received, 
and  he  will  hesitate  before  asking  another  of  the  same 
kind,  whereas  this  effect  will  be  entirely  lost  if  the 
extension  is  granted  merely  by  reason  of  the  request. 
Sometimes  a  reduction  in  pajnuents  for  a  limited  time 
will  answer  the  purpose.  In  any  event,  do  not  let  the 
debtor  take  the  extension,  if  it  can  possibly  be  avoided. 
Always  give  it  to  him  if  no  other  way  is  found. 

There  are  a  great  many  requests  for  extensions  that 
are  manifestly  unfair  to  the  House,  and  these  should  not 
be  granted  under  any  circumstances,  even  though  it  is 
necessary  to  force  matters  to  a  final  decision.  Some  of 
the  excuses  offered  are  so  unreasonable  and  so  unfair  as 
to  cause  wonder  at  the  effrontery  displayed  in  advancing 
them.  Here  are  a  few  of  the  most  common:  Debtor 
wishes  to  meet  another  obligation;  needs  all  his  money 
to  purchase  Christmas  presents ;  expects  to  go  on  a  vaca- 
tion and  needs  all  his  money  for  that  purpose ;  has  gone 
into  business  which  requires  all  his  capital ;  has  just  been 
married ;  is  building  a  home ;  has  a  life-insurance  payment 
coming  due — and  so  on  endlessly.     None  of  these  is  a 


236  Mail-Order  Instalment  CoUedions 

legitimate  excuse  for  nonpayment.  They  have  to  do  with 
matters  within  the  debtor's  control,  and  he  has  no  moral 
right  to  expert  the  House  to  stand  aside  while  he  takes 
care  of  others  no  more  deserving  of  consideration,  and 
this  fact  should  be  impressed  upon  him  in  no  doubtful 
terms.  The  debtor  must  never  be  allowed  to  place  his 
instalment  account  at  the  bottom  of  the  list,  because  he 
may  never  reach  the  bottom. 

A  collection  correspondent  will  be  struck  with  the  large 
amount  of  sickness  and  misfortune  which  overtakes  the 
House's  customers.  In  a  thousand  accounts  upon  which 
extensions  were  requested,  taken  from  the  files  of  a  large 
concern,  over  30  per  cent  were  based  on  the  plea  of 
illness.  Probably  but  half  of  these  were  genuine,  yet 
when  a  debtor  says  he  is  ill  it  is  impossible  to  contradict 
him  flatly.  Experienced  correspondents  develop  an 
uncanny  faculty  for  detecting  insincerity  on  the  part  of 
debtors,  and  a  few  discreet  inquiries  by  mail  will  usually 
develop  the  truthfulness  or  falsity  of  such  statements 
and  dictate  the  action  to  be  taken. 

Illness,  of  course,  is  a  legitimate  excuse  for  nonpay- 
ment, as  is  also  unemployment,  but  these  two  excuses  are 
fairly  easy  to  check  up,  and  this  should  be  done  in  all 
cases,  unless  the  correspondent  fears  to  lose  his  faith  in 
the  truthfulness  of  mankind  in  general.  Every  effort 
possible  should  be  made,  however,  to  protect  the  sincere 
and  deserving  delinquent,  because  he  usually  has  trouble 
enough  in  overcoming  his  personal  obstacles. 

There  is  also  a  class  of  debtors  who  will  seize  eagerly 
upon  any  condition  of  the  country  as  an  excuse  for  non- 
payment. Perhaps  a  flood  or  a  fire  that  has  not  affected 
them  at  all  will  be  advanced  as  an  excuse,  to  say  nothing 
of  the  old  reliable  ''hard  times"  classic.  It  does  not 
matter  how  delinquent  the  account  was  before  the  fire, 


Psychology  of  Instalment  Debtor  237 

flood,  strike,  or  whatever  it  is  occurred ;  the  event  is  given 
as  the  cause  of  the  delinquency,  and  it  then  becomes  the 
duty  of  the  correspondent  to  point  out  that  the  excuse 
does  not  ring  true  and  that  the  event  or  condition  appears 
to  be  an  excuse  rather  than  a  cause. 

The  Debtor's  Viewpoint 

The  first  thing  the  instalment  collector  must  learn  is 
that  he  is  not  collecting  from  business  concerns,  but  from 
individuals,  the  great  majority  of  whom  are  more  or  less 
unfamiliar  with  ordinary  business  customs  and  usages 
and  totally  ignorant  of  a  great  many  things  that  the 
collector  would  take  for  granted  if  he  were  writing  to  a 
rated  merchant  or  firm.  The  ordinary  mail-order  buyer 
has  a  very  hazy  conception  of  the  nature  of  a  contract  or 
agreement  of  any  kind  made  at  the  time  of  purchase, 
and  is  given  to  delivering  ultimata  as  to  what  he  will  and 
will  not  do  later  on  in  the  history  of  the  account.  For 
instance,  a  debtor  may  find  it  inconvenient  to  pay,  for 
some  reason  or  other,  and  inform  the  House  to  this  effect. 
Then,  whether  the  House  has  granted  him  the  extension 
or  not,  he  will  take  vigorous  exception  to  any  further 
effort  to  collect  from  him,  maintaining  that  the  House  is 
"hounding  him."  A  debtor  who  has  purchased  goods 
under  an  ironclad  contract  with  the  terms  of  payment 
clearly  and  specifically  outlined  will  write,  '*I  told  you 
that  I  had  other  bills  to  meet  this  month,  so  why  do  you 
keep  on  dunning  me?"  or,  "I  told  you  in  my  previous 
letter  what  I  would  do.  If  you  do  not  think  I  am  honest, 
say  so,"  and  so  on. 

Such  letters  are  not  ordinarily  written  with  a  desire 
to  defraud  the  House  or  to  escape  ultimate  payment,  but 
rather  in  ignorance  of  the  moral  and  legal  significance 
of  a  written  agreement.     Of  course,  with  Simmons  we 


238  Mail-Order  Instalment  Collections 

can  threaten  to  take  his  diamond  away  from  him,  but 
with  Ryan  we  must  be  patient  and  diplomatic,  constantly 
explaining  the  equities  of  the  situation,  appealing  to  his 
sense  of  fairness  and  justice,  and  endeavoring  to  make 
the  House  a  personal  entity  in  Ryan's  eyes,  rather  than 
an  impersonal,  cold-blooded  corporation.  There  is  a 
period  in  the  history  of  every  account  that  becomes 
sufficiently  delinquent  where  cold-blooded  business 
methods  must  be  adopted,  but  this  is  when  Simmons, 
Ryan,  et  al.  receive  no  more  letters  on  the  stationery  of 
the  House  but  from  the  collection  agency. 

Writing  to  the  Chief 

When  a  customer  has  a  grievance  against  the  clerks  in 
a  store  he  is  prone  to  hunt  up  the  "boss"  to  air  it.  It  is 
human  nature  to  go  to  the  fountain-head  for  redress.  So 
the  mail-order  instalment  buyer  will  write  to  the 
president  or  any  other  officer  whose  name  he  can  discover 
on  the  letterhead  or  literature  of  the  House.  He  will  do 
this  either  because  he  thinks  his  case  an  extraordinary 
one  and  worthy  of  the  personal  attention  of  the  chief 
executive,  or  because  he  believes  he  can  make  trouble  for 
the  minion  of  the  collection  department  who  has  been 
''hounding"  him. 

The  progressive  instalment  collector  has  not  been  slow 
to  recognize  this  extremely  human  trait  and  has  turned 
it  to  his  own  advantage.  A  debtor  who  has  ignored  a 
whole  series  of  letters  signed  by  a  mere  correspondent 
is  very  likely  to  respond  to  a  letter  signed  by  the  presi- 
dent, treasurer,  or  other  important  executive.  For 
instance,  the  debtor  has  gone  through  a  series  of  letters, 
each  more  insistent  than  the  last,  until  finally  extreme 
measures  are  threatened.  Then  he  will  get  a  letter  from 
the  president  stating  that  Mr.  Blank  of  the  collection 


Psychology  of  Instalment  Debtor  239 

department  has  asked  his  (the  executive's)  permission 
to  take  extreme  measures,  but  before  giving  this  per- 
mission the  president  determined  to  write  the  debtor,  as 
he  feels  sure  that  there  must  be  some  satisfactory  way 
out  of  the  difificulty.  Perhaps  Mr.  Blank  has  not  handled 
the  matter  efficiently,  or  some  letter  that  would  have 
cleared  up  the  whole  situation  hasi^one  astray.  Perhaps 
the  debtor  has  misunderstood  and  allowed  himself  to 
become  disturbed  by  something  that  the  president  can 
easily  adjust,  and  so  on. 

Such  a  letter  will  bring  a  large  percentage  of  replies, 
some  explanatory,  some  complaining  of  the  persecution 
of  the  debtor  by  Mr.  Blank,  and  nearly  all  of  them  open- 
ing a  way  for  a  satisfactory  settlement.  Such  letters  are 
not  to  be  considered  in  the  nature  of  decoys  or  subter- 
fuges. They  are  really  the  expression  of  a  sincere  desire 
on  the  part  of  the  House  to  adjust  an  unsatisfactory 
situation  when  other  means  have  failed. 

It  is  only  natural  that  one  holding  to  an  untenable 
position  should  wish  to  recede  as  gracefully  as  possible — 
in  other  words  to  "save  face,"  and  such  a  letter  offers 
one  so  inclined  an  excellent  opportunity.  A  debtor  may 
have  allowed  his  account  to  drag  along  until  the  situation 
becomes  extremely  strained  and  wish  to  make  payment, 
or  reach  a  condition  where  he  can  make  payment,  but  still 
hgld  oif  because  he  does  not  wish  the  enemy  at  the  other 
end  to  think  that  he  frightened  him  into  it.  It  is  there- 
fore advisable  that  each  belligerent  stop  firing  now  and 
then  to  peer  over  the  earthworks  and.  see  if  the  other 
fellow  has  not  had  enough.  It  may  be  that  the  debtor  is 
extremely  desirous  of  an  honorable  peace,  but  will  fight 
to  the  bitter  end  before  making  an  unconditional  sur- 
render. 


240  Mail-Order  Instalment  Collections 

Good  Intentions 

A  very  common  letter  from  debtors  reads  something 
like  this :  ' '  I  have  delayed  writing  you  because  I  hoped 
to  be  in  a  position  to  send  a  payment  along  with  my 
letter."  Another  favorite  form  is,  ''I  have  been  away 
from  home  on  business  for  the  past  three  months  and 
just  received  your  insulting  letter  today."  Each  of  these 
letters  present  a  distinct  type.  Both  debtors  are  angry 
and  have  taken  exception  to  letters  received  from  the 
House.  The  writer  of  the  first  letter  is  entitled  to  more 
consideration  than  the  latter,  although  he  has  not  dis- 
played a  greater  amount  of  common  sense. 

There  is  just  one  x>olicy  to  pursue  with  a  debtor  who 
does  not  pay  and  who  will  not  explain.  He  must  be  given 
every  possible  chance  to  do  either,  but  finally  he  must 
get  a  letter  that  will  make  him  angry.  He  has  already 
received  from  six  to  twenty  letters,  beginning  with 
extremely  courteous  "easy"  requests  and  gradually 
growing  in  insistence,  but  he  has  not  responded.  Then 
when  he  gets  one  that  jolts  him  out  of  his  silence,  he 
forgets  or  disregards  everything  that  has  gone  before, 
ignores  the  fact  that  he  should  at  least  have  explained 
his  delinquency  months  ago,  and  becomes  highly  indignant 
that  such  a  letter  as  the  last  one  should  be  addressed  to 
him.  Eemember,  he  has  intended  to  pay  all  along,  but 
he  has  not  taken  the  trouble  to  advise  the  House  of  his 
good  intentions,  and  for  all  they  know  he  may  lack  them 
entirely.  He  is  mad  now  and  doesn't  care  whether  he 
pays  or  not,  and  if  we  think  we  can  bluff  him,  why  try  it, 
etc. 

The  debtor  who  has  been  away  for  several  months 
probably  is  simply  giving  this  as  an  excuse.  The  fact 
that  he  has  been  away  is  not  a  legitimate  reason  why  he 


Psychology  of  Instalment  Debtor  241 

should  not  pay,  and  he  has  no  right  to  declare  a  mora- 
torium for  this  reason.  If  his  mail  did  not  follow  him 
(as  he  is  apt  to  state)  he  found  the  "easy"  letters  as 
well  as  the  'insulting"  one  upon  his  return,  and  he  need 
but  compare  the  dates  to  determine  that  he  received 
ample  consideration.  Anyway,  the  object  of  the  letters 
has  been  accomplished  and  it  remains  for  the  corre- 
spondent to  pour  oil  on  the  troubled  waters  and  convince 
the  gentleman,  not  that  he  is  in  the  wrong,  but  that  the 
best  thing  to  do  is  to  wipe  the  slate  clean  and  make  a 
fresh  start. 

TEST  QUESTIONS 

1.  How  should  the  collector  treat  abusive  letters  sent  to 
him? 

2.  "What  rights  has  he  against  a  debtor  who  persists  on 
writing  abusive  letters  ? 

3.  For  what  two  main  reasons  does  a  debtor  ask  for  exten- 
sions?   AVhat  are  some  of  the  main  excuses  offered  under  each? 

4.  How  should  the  collector  handle  each  set  of  excuses? 

5.  What  is  the  psychological  effect  of  a  letter  from  or  to 
the  chief? 

6.  To  what  extent  can  the  instalment  collector  rely  upon  the 
professed  good  intentions  of  debtors? 


CHAPTER  IV 
special  collection  devices 

Dbafts 

An  ordinary  mercantile  account,  if  not  paid  within  a 
reasonable  time  after  it  becomes  due,  is  subject  to  draft; 
that  is,  the  jobber  or  manufacturer,  after  due  notice,  will 
draw  upon  the  merchant  through  a  local  bank  for  the 
amount  due.  This  is  an  ordinary  commercial  custom  and 
is  not  construed  by  either  debtor  or  creditor  as  an 
unfriendly  or  arbitrary  action ;  in  fact,  many  firms  prefer 
to  pay  in  this  way,  as  the  paid  draft  is  a  receipt  and  the 
transaction  is  promptly  closed.  The  draft  system  should 
also  be  an  ideal  way  to  collect  instalment  mail-order 
accounts,  as  the  debtor  would  be  spared  the  necessity  of 
buying  a  money  order  or  mailing  his  remittance.  A  bank 
in  his  town  would  present  him  a  draft  each  week  or  month 
and  deliver  the  draft  to  him  upon  payment  as  his  receipt. 
This  would  obviate  all  possibility  of  loss  in  the  mail  and 
all  chance  of  clerical  error  on  the  part  of  the  House  in 
crediting  remittances. 

The  theory  does  not  work  out  in  practice,  however,  for 
the  reason  that  the  ordinary  instalment  debtor  does  not 
have  a  clear  conception  of  drafts,  and  is  more  likely  than 
not  to  consider  it  as  an  attempt  on  the  part  of  the  House 
to  enforce  payment,  the  alternative  being  that  the  refusal 
or  inability  to  pay  the  draft  when  presented  will  injure 
his  credit  standing  with  the  bank,  or  that  some  undefined, 
undesirable  situation  will  develop  by  reason  of  the  draft. 

242 


Special  Collection  Devices  24^3 

An  instalment  concern  selling  to  a  comparatively  high- 
class  clientele  kept  a  careful  record  of  complaints  as  a 
result  of  its  draft  system  over  a  period  of  several  months 
and  found  that  over  half  displayed  an  ignorance  of  the 
real  significance  of  a  draft.  Such  statements  as  the 
following  were  quite  common:  '*I  have  no  account  in 
the  Blank  Bank,  therefore  you  will  not  get  anything  by 
drawing  on  me,"  and  "Your  underhanded  attempt  to 
draw  on  my  bank  account  did  not  succeed,  as  I  told  the 
bank  not  to  pay  you. ' '  In  fact,  a  good  many  of  the  letters 
indicated  a  belief  that  a  draft  was  some  sort  of  legal 
process  in  the  nature  of  a  garnishee.  Of  course,  in 
dealing  with  men  like  Brainerd,  who  purchased  the 
billiard  table,  this  condition  would  not  be  encountered. 
He  understands  the  draft  and  would  probably  prefer  to 
pay  in  that  way,  but  it  is  safe  to  say  that  the  rank  and 
file  of  instalment  buyers  will  not  respond  to  the  draft  in 
sufficient  degree  to  compensate  for  the  loss  and  damage 
that  will  accrue  through  those  who  do  not  understand  it. 

Taking  advantage  of  the  situation  just  outlined,  we 
can  often  use  the  draft  effectively  after  every  other  effort 
to  collect  has  been  exhausted.  The  debtor  is  informed 
that  the  House  is  about  convinced  that  it  is  not  his  inten- 
tion to  pay  until  forced  to  do  so,  but  before  taking  the 
drastic  action  that  his  account  would  seem  to  warrant, 
it  is  making  a  draft  which  will  place  him  squarely  upon 
record  and  dictate  the  further  action  of  the  House.  This 
puts  it  up  to  the  debtor  who  does  not  understand  drafts 
in  a  solid,  cold-blooded  manner,  and  when  the  draft  is 
actually  presented  to  him  he  will  think  twice  before 
refusing  it. 

A  mercantile  draft  is  usually  deposited  in  the  creditor's 
bank,  which  in  turn  forwards  it  to  a  correspondent  in 
the  debtor's  city  for  presentation.    Instalment  drafts  are 


244  Mail-Order  Instalment  Collections 

not  handled  in  this  way  however,  being  sent  direct  to  the 
bank  in  the  debtor's  town,  with  notice  that  they  are  not 
subject  to  protest.  The  banks  do  not  consider  these 
drafts  very  highly,  usually  calling  them  "punchers,"  and 
of  late  years  a  majority  of  banks  will  not  present  or 
return  such  drafts  unless  accompanied  by  ten,  fifteen,  or 
twenty-five  cents  to  cover  cost  of  presentation,  so  few  of 
them  being  paid  that  the  proceeds  do  not  cover  the 
expense  and  bother  involved.  It  is  absolutely  necessary 
that  a  draft  be  presented  if  this  action  is  threatened  in 
the  manner  outlined  above.  The  only  way  to  insure  its 
presentation  is  to  inclose  at  least  ten  cents  to  cover  cost 
of  presentation,  and  this  amount,  together  with  postage, 
etc.,  will  result  in  an  expense  that  is  hardly  justified, 
except  in  extreme  cases. 

Legal  Pitfalls 

The  three  pitfalls  to  be  avoided  by  the  collection 
correspondent  are  blackmail,  libel,  and  the  postal  regu- 
lations. 

Blackmail  is  "extortion  of  money  by  intimidation, 
threats,  or  accusation." 

Libel  is  "any  statement  published  without  just  cause 
or  excuse,  expressed  either  in  print  or  in  writing,  tending 
to  expose  another  to  public  hatred,  contempt,  or  ridicule." 

From  the  standpoint  of  the  collection  correspondent 
libel  and  blackmail  are  closely  similar.  The  behavior  of 
a  debtor  may  be  of  a  nature  to  expose  him  to  "public 
hatred,  contempt,  or  ridicule,"  but  a  direct  threat  to 
expose  this  behavior  unless  pajinent  was  made  would  be 
construed  as  blackmail.  The  fact  that  the  accusations 
would  be  true  and  the  debtor  really  deser\'ed  "public 
hatred,  contempt,  and  ridicule,"  would  not  change  the 
situation. 


Special  Collection  Devices  245 

Yet  the  skillful  collector  can  with  perfect  safety  implant 
in  the  mind  of  the  debtor  by  indirect  means  the  same  idea 
of  consequences  as  he  would  by  a  direct  illegal  threat. 
For  instance,  the  following  would  be  decidedly  illegal: 
'*  Unless  a  remittance  is  received  by  return  mail,  we  shall 
take  steps  to  show  you  up  among  your  friends  and  neigh- 
bors in  your  true  colors  as  a  man  without  honor  enough 
to  pay  his  just  debts. ' '  The  following  would  accomplish 
the  same  results  and  at  the  same  time  be  free  from  the 
objections  noted:  ''We  trust  you  will  not  force  us  to 
take  action  which  can  but  result  in  unpleasant  and 
embarrassing  publicity  both  for  you  and  for  us,"  or  "We 
do  not  believe  you  are  a  deadbeat  and  we  have  no  desire 
to  place  you  in  a  false  light  among  your  friends  and 
neighbors,  but  your  account  has  reached  a  point  where 
we  must  take  steps  to  protect  ourselves,  and  we  therefore 
disclaim  all  responsibility  for  what  may  happen  as  the 
result  of  your  continued  disregard  of  your  obligation." 
In  these  two  examples  nothing  is  directly  threatened.  In 
fact,  the  desire  to  protect  the  debtor  is  emphasized,  and 
if  anything  unfortunate  does  occur,  it  will  be  the  logical 
and  inevitable  result  of  the  attempted  enforcement  of 
collection. 

The  postal  regulations  forbid  the  display  either  on  the 
envelope  or  upon  a  postal  card  of  anything  that  will 
convey  the  idea  that  the  addressee  is  being  dunned,  any- 
thing in  the  nature  of  a  threat,  either  legal  or  illegal — 
in  fact  anything  that  may  broadly  be  considered  to  reflect 
upon  the  character  of  the  person  addressed.  It  is  per- 
missible to  render  a  statement  upon  a  postal  card,  giving 
date  of  payment  due,  discounts,  etc.,  but  nothing  in  the 
way  of  a  penalty  for  nonpayment  may  be  added.  Nor  is 
it  permissible  to  print  an  advertisement  upon  an  envelope 
indicating  that  the  business  of  the  sender  is  to  collect  bad 


246  Mail-Order  Instalment  Collections 

debts.  It  is,  of  course,  against  the  postal  regulations  to 
write  anything  in  a  letter  which  will  violate  any  state  or 
federal  statute. 

The  Collection  Agency 

The  average  business  concern  desires  to  maintain  a 
certain  dignity  of  attitude,  varying  of  course  with  the 
nature  of  the  business  and  the  character  of  its  customers. 
The  policy  of  the  House  will  set  a  certain  limit  beyond 
which  it  is  inexpedient,  as  a  matter  of  business  and  ethics, 
to  go  as  regards  both  the  sales  and  collection  depart- 
ments. Just  as  in  the  sales  department  a  too  enthu- 
siastic presentation  of  the  article  to  be  sold  may  border 
upon  misrepresentation,  so  in  the  collection  department, 
a  too  drastic  effort  to  enforce  collection  may  cause 
embarrassment. 

A  concern  spending  thousands  of  dollars  to  advertise 
the  fact  that  "We  trust  the  people"  and  that  "Your 
credit  is  good,"  cannot  with  propriety  appear  in  the 
courts  as  plaintiff  against  these  same  "people,"  or 
assume  the  position  of  exerting  indirect  and  perhaps 
unethical  pressure  upon  a  debtor,  his  employer,  or  his 
social  or  business  affiliations.  Yet  there  comes  a  time 
in  the  collection  of  some  accounts  where  the  expedients 
available  to  the  collection  department  thus  circumscribed 
are  insufficient.  The  debtor  remains  callous  to  all  appeals 
to  his  honor,  either  assuming  an  attitude  of  defiance  or 
maintaining  a  seemingly  contemptuous  silence.  In  such 
a  case  the  malady  requires  stronger  remedies  than  the 
medicine  chest  contains  and  a  doctor  must  be  called  in. 
The  doctor  is  the  collection  agency.  It  is  not  "within  the 
scope  of  this  article  to  discuss  the  methods  of  collection 
agencies,  as  this  is  a  distinct  subject  in  itself,  but  rather 
to  ascertain  what  can  be  accomplished  by  their  use. 


Special  Collection  Devices  247 

By  the  average  person,  the  collection  agency  is  held  in 
about  the  same  estimation  as  the  so-called  loan  shark  or 
the  Black  Hand  Society,  and  in  this  fact  lies  its  chief 
weapon  of  offense.  Having  no  reputation  to  lose  and 
caring  nothing  for  the  good  will  or  ill  will  of  the  debtor 
or  the  public  in  general,  the  collection  agency  is  a  free 
agent,  free  to  adopt  any  method,  no  matter  how  irregular 
from  a  business  or  ethical  standpoint,  that  may  cause  the 
debtor  embarrassment  or  mental  anguish,  its  procedure 
being  limited  only  by  the  postal  regulations  and  the  laws 
governing  libel  and  threats.  The  legal  phase  of  the  mat- 
ter does  not  handicap  the  efficient  collection  agency  in 
any  way,  however,  because  direct  and  specific  actions  are 
never  indicated  in  any  branch  of  collection  work.  In 
agency  work  especially  a  specific  threat  will  inform  the 
debtor  just  what  will  be  done  and  he  will  discount  the 
effect.  He  knows  what  is  coming  and  will  prepare  for 
it.  Even  though  a  fixed  and  specific  program  is  to  be 
followed,  it  is  fatal  to  disclose  this  in  advance  to  the 
debtor;  he  must  be  kept  in  a  state  of  uncertainty,  not 
knowing  what  is  going  to  happen  next.  He  knows  he  is 
in  the  hands  of  a  pirate  who  respects  no  rules,  cares 
nothing  for  the  ethics  of  his  case,  and  will  take  any 
unfair  advantage  of  him  possible,  even  to  the  extent  of 
delving  into  his  past  life,  corresponding  with  his  business 
and  personal  connections,  indirectly  and  legally  advertis- 
ing him  as  a  deadbeat. 

These  eventualities  are  indirectly  indicated  in  the  let- 
ters sent  out  by  the  agency,  and  if  the  debtor  still  remains 
obdurate  something  of  an  unpleasant  nature  actually 
occurs.  Perhaps  his  employer,  his  banker,  or  a  friend 
will  receive  an  offer  of  his  account  for  sale,  or  broadcast 
inquiries  will  be  made  regarding  his  credit  standing 
anaxong  the  merchants  of  his  town,  some  of  which  are 


248  Mail-Order  Instalment  Collections 

bound  to  be  brought  to  his  attention.  At  the  same  time 
he  is  recei\T.ng  intimations  from  the  agency  that  they  are 
preparing  to  "go  after  him"  in  a  stronger  and  more 
efficacious  manner,  one  that  "never  fails  to  get  results." 
He  feels  that  he  is  pitted  against  an  mvisible  and 
insidious  enemy  who  is  fighting  from  behind  and  will 
not  allow  him  a  chance  to  fight  back.  If  this  enemy  would 
only  sue  him  he  could  soon  show  him  that  he  could  not 
collect  a  judgment,  but  he  does  not  like  these  mining 
operations  by  a  foe  who  will  not  tell  him  what  is  being 
done,  but  whose  acti\aties  are  made  apparent  by  strange 
noises  in  the  ground,  rustlings  in  dark  corners,  and  a 
general  air  of  uncertainty  as  to  what  is  afoot.  Uncer- 
tainty is  the  father  of  fear,  and  fear  kills  more  than 
bullets. 

Accounts  should  never  be  placed  with  a  collection 
agency  until  all  hope  of  an  amicable  settlement  has  been 
abandoned,  and  then  only  such  accounts  as  appear  to 
require  this  treatment.  A  collection  agency  cannot  create 
money  in  the  debtor's  pocket,  and  care  should  always 
be  exercised  to  ascertain  the  reason  for  nonpayment 
before  extreme  measures  are  used.  No  profit  can  accrue 
by  hounding  one  who  cannot  pay.  Besides,  a  debtor  who 
cannot  pay  now  may  be  in  a  position  to  do  so  six  months 
or  a  year  henoe,  and  it  is  better  to  hold  an  account  in 
abeyance  with  some  prospect  of  ultimate  recovery  than 
to  force  it  to  a  conclusion  regardless  of  conditions. 

Collections  by  Attorneys 

As  regards  the  instalment  mail-order  business,  attor- 
neys as  collectors  leave  a  great  deal  to  be  desired.  This 
is  due  in  large  measure  to  the  nature  of  the  accounts 
themselves,  and  also  in  some  degree  to  the  inefficiency, 
as  a  collector  of  money,  of  the  average  attorney. 


Special  Collection  Devices  249 

Aside  from  the  legal  standpoint,  there  is  no  particular 
reason  why  an  attorney  should  be  a  better  collector  than 
anyone  else,  and  he  usually  is  not.  If  payment  can  be 
enforced  by  judgment  he  can  set  the  machinery  of  the 
law  in  motion  and  effect  collection,  but  skill  in  collecting 
does  not  enter  into  such  a  situation.  All  accounts  are  not 
enforcible  by  judgment,  and  the  efficient  collector  will  not 
advance  costs  of  suit  unless  he  is  satisfied  that  an  account 
is  so  enforcible.  To  send  an  unenforcible  claim  to  an 
attorney  is  usually  to  destroy  all  prospect  of  ultimate 
collection.  All  the  attorney  can  do  is  to  threaten  suit. 
(The  house  has  already  done  that.)  Perhaps  this  threat 
from  a  local  attorney  may  impress  it  upon  the  debtor 
more  strongly  that  the  House  means  business,  and  in 
this  way  settlement  be  effected,  but  if  he  still  remains 
obdurate  and  defiant,  there  is  nothing  to  be  done  but 
actually  to  file  suit.  If  the  House  will  not  do  this,  the 
attorney  returns  the  claim.  The  debtor  then  prides 
himself  upon  his  astuteness  in  beating  his  creditor  and 
thus  another  parasite  is  trained  to  prey  upon  every  mail- 
order concern  that  will  grant  him  credit. 

There  are  a  great  many  attorneys  who  make  a  specialty 
of  collections,  some  of  whom  are  very  efficient,  but  these 
cannot  be  picked  out  haphazard  from  a  list  containing 
tens  of  thousands  of  names,  such  as  Martindale's  and 
the  United  States  Fidelity  and  Guaranty  Company's  lists. 
Suppose  we  wish  to  forward  our  claim  against  Simmons 
to  an  attorney  in  McCook,  Kansas.  Our  list  shows  per- 
haps ten  attorneys  there.  Probably  one  of  these  is  a 
good  collector  and  will  be  glad  to  receive  the  business. 
In  that  list  of  ten  attorneys,  however,  are  embraced  the 
best  attorneys  of  the  town,  enjoying  large  practices,  who 
would  not  care  to  be  bothered  with  a  petty  claim  against 
a  brakeman  on  the  Union  Pacific.    There  are  also  listed 


250  Mail-Order  Instalment  Collections 

the  worst  attorneys  in  the  town,  whose  inefficiency  will 
make  the  exasperated  collector  wonder  how  they  ever  got 
by  the  bar  examination.  How  are  we  going  to  judge? 
"VYe  cannot,  and  therefore  must  guess  and  trust  to  luck, 
with  the  chances  at  least  even  that  we  shall  guess 
wrongly. 

The  collector  forwarding  large  numbers  of  claims  will 
gradually  build  up  a  small  list  of  his  own  of  attorneys 
who  are  willing  and  competent,  but  this  list  must  of 
necessity  be  very  incomplete  and  cover  but  a  very  few 
towns  in  the  aggregate.  The  claim  against  Simmons  may 
be  the  first  one  we  have  for^varded  to  McCook,  and  it 
may  be  years  before  we  have  another.  Besides,  attorneys 
on  such  a  list  do  not  remain  constant.  The  efficient  col- 
lector may  be  a  bright  young  attorney  just  entering 
practice  who  needs  the  money.  As  time  goes  on,  his 
practice  grows  and  he  is  no  longer  interested  in  the  chips 
and  whetstones  that  kept  the  pot  boiling  during  the  lean 
years  of  his  no\T.tiate. 

Another  important  factor  entering  into  the  situation 
is  the  nature  of  the  account.  Even  though  the  entire 
balance  may  be  past  due,  it  is  almost  an  axiom  that  it 
cannot  be  collected  in  a  lump  sum,  but  must  be  secured 
in  instalments  no  larger  than  those  designated  in  the 
sales  contract.  The  debtor  may  be  willing  and  able  to 
pay  five  dollars  a  month  on  a  fifty-dollar  balance,  whereas 
to  raise  fifty  dollars  at  one  time  would  be  impossible. 
Such  accounts  are  hard  and  slow  pay  any^vay,  otherwise 
they  would  not  be  in  an  attorney's  hands.  The  ordinary 
fee  is  20  to  333/.  pej-  cent.  The  average  attorney  does 
not  care  to  dun  a  debtor  month  after  month  for  a  fee 
of  one  or  two  dollars. 

To  sum  up:  If  collection  is  enforcible  by  judgment 
and  execution,  it  should,  after  fair  warning,  be  sent  to 


Special  Collection  Devices  251 

an  attorney  with  instructions  to  file  suit.  If  collection 
by  these  means  is  doubtful  or  impossible,  however,  to 
forward  it  to  any  but  a  known  attorney  is  to  run  a  grave 
risk  of  destroying  all  chance  of  ultimate  collection.  It 
is  much  safer  to  send  the  claim  to  a  reputable  collection 
agencj^,  which  will  sue  quickly  enough  if  .circumstances 
warrant,  and  which  will  in  addition  know  of  many  ways 
and  means  to  enforce  payment  aside  from  legal  measures. 

Form -Letters 

If  we  have  exactly  the  same  message  to  convey  to  a 
thousand  people,  it  is  extravagant  folly  to  write  each  of 
them  a  specially  dictated  letter.  If  we  have  a  thousand 
debtors  who  have  allowed  their  accounts  to  become  delin- 
quent for  a  certain  period  without  explanation,  a  letter 
written  to  one  of  them  calling  his  attention  to  the  fact 
will  do  for  the  other  999  equally  as  well;  therefore  we 
send  them  a  form-letter,  or  stock-letter  printed  in  large 
quantities  on  machines  designed  to  reproduce  typewriting 
and  filled  in  with  the  debtors'  names  and  addresses. 
Suppose  five  hundred  debtors  respond  to  this  letter.  We 
have  left  five  hundred  who  must  be  written  to  again.  As 
before,  one  letter  will  apply  equally  to  all;  therefore 
another  form-letter  will  be  the  logical  thing,  and  so  on. 
Without  the  form-letter  the  modern  mail  order  instalment 
collection  department  handling  hundreds  of  thousands  of 
accounts  could  hardly  exist,  for  an  ordinary  operator 
will  turn  out  as  many  form-letters  as  twelve  operators 
writing  on  the  typewriter,  and  of  course  at  a  fraction  of 
the  cost. 

A  person  who  receives  a  form-letter,  either  a  sales  or 
collection  letter,  should  not  consider  it  to  be  a  circular. 
It  is  the  House's  message  to  him,  just  as  much  as  if  it 
were  written  in  longhand  by  the  president.     The  form- 


252  Mail-Order  Instalment  Collections 

letter  simply  indicates  that  the  House  is  writing  to  a 
great  number  of  people  about  the  same  thing,  and  is 
transacting  its  business  in  the  most  economical  and 
expeditious  manner.  Therefore  he  who  ignores  a  form- 
letter  simply  because  it  is  a  form-letter  is  just  as  guilty 
of  business  discourtesy  as  though  he  failed  to  answer  a 
specially  written  letter. 

As  a  concrete  example  of  the  use  of  form-letters,  let 
us  assume  that  the  firm  selling  Simmons  the  diamond 
uses  a  series  of  fifteen  ''regular"  form-letters  at  inter- 
vals of  ten  days  each  before  the  account  is  given  to  a 
local  attorney  or  a  collection  agency.  This  will  give 
Simmons  one  hundred  and  fifty  days,  or  approximately 
five  months,  to  pay  or  explain.  The  letters  will  be  pro- 
gressive, starting  with  courteous  reminders,  gradually 
increasing  in  insistence,  up  to  a  point  where  they  get 
under  his  armor  of  silence  or  indifference,  and  elicit 
some  sort  of  response.  Suppose  he  sends  a  pa>Tnent 
in  response  to  the  fifth  letter,  and  again  allows  his  account 
to  lapse.  We  cannot  start  him  over  again  with  the  first 
letter  and  so  on  each  time  he  makes  a  payment  and  again 
becomes  delinquent,  else  he  will  "learn  the  combination" 
and  know  just  what  letter  he  is  to  get,  and  the  point 
that  he  cannot  safely  pass  without  drastic  action  on  the 
part  of  the  House.  To  overcome  this  difficulty  we  must 
have  several  series  of  form-letters.  Now,  if  Simmons 
has  paid  on  the  fifth  letter  of  the  first  series  and  again 
becomes  delinquent,  we  start  him  out  on  the  second  series, 
and  send  letters  of  this  series  to  him  up  to  the  point 
where  he  paid  on  the  first  series — that  is,  if  he  paid  on 
the  fifth  letter  of  the  first  series,  we  send  him  the  first 
fiye  letters  of  the  second  series  and  then  revert  to  the 
first  series,  starting  with  the  sixth  letter,  and  so  on.  Any 
number  of  series  may  be  evolved  to  fit  the  specific  needs 


Special  Collection  Devices  253 

of  the  business,  but  for  the  sake  of  simplicity  each  series 
should  revert  to  the  first  series  at  the  point  where  the 
last  payment  was  received  on  that  (first)  series. 

Suppose,  however,  that  Simmons  does  not  pay,  but  the 
fifth  letter  elicits  an  explanation  or  a  complaint.  This, 
of  course,  must  be  given  special  attention,  and  as  long 
as  Simmons  responds  to  specially  dictated  letters  he  must 
receive  them  in  return.  The  average  debtor,  however,  if 
denied  an  adjustment  suggested  by  himself,  will  not 
respond  to  further  correspondence,  and  therefore  '*  spe- 
cial" form-letters  must  be  designed  to  follow  specially 
dictated  letters,  and  if  the  debtor  continues  obdurate 
the  account  should  go  back  into  the  first  series  of 
''regular"  forms  within  a  reasonable  time.  For  instance, 
Simmons  writes  in  reply  to  the  fifth  letter  that  his 
diamond  has  lost  its  brilliancy  and  that  he  believes  he 
has  been  swindled.  He  mil  get  a  reply  explaining  that 
the  diamond  is  probably  dirty,  telling  him  what  steps 
to  take  to  restore  its  brilliancy  and  reassuring  him  as  to 
the  value  of  his  purchase.  If  Simmons  is  acting  in  good 
faith  he  follows  directions,  is  reassured,  and  resumes 
payments.  If  he  is  not  acting  in  good  faith  and  has 
simply  .given  this  as  an  excuse  to  escape  or  defer  pay- 
ment, his  defense  has  been  met  and  overcome  and  he 
/  therefore  remains  silent.  In  any  event,  whatever  the 
nature  of  the  special  correspondence,  the  skillful  corre- 
spondent will  so  construct  his  letter  that  a  reply  will  be 
in  order.  If  this  is  not  forthcoming,  a  ''special"  form 
follows  in  due  course,  calling  attention  to  the  House's 
desire  to  adjust  the  situation  in  a  satisfactory  manner, 
adding  that  in  order  to  do  this  the  co-operation  of  the 
debtor  will  be  necessary,  and  asking  for  a  reply.  This 
"special"  form-letter  will  be  followed  by  others  of  a 
progressive  nature,  designed  to  lead  logically  to  a  point 


254  Mail-Order  Instalment  Collections 

in  the  first  series  of  ''regular"  forms,  in  whieh  the 
account  follows  out  its  career. 

The  judicious  use  of  form-letters  will  save  thousands 
of  dollars  in  a  collection  department  of  any  size.  If  an 
extension  is  granted  on  an  account,  a  form-letter  will 
often  advise  the  debtor  that  his  request  has  been  granted, 
and  another  form-letter  will  notify  him  that  the  exten- 
sion has  expired,  followed  by  others  leading  logically 
back  to  the  main  series  in  case  of  nonpayment.  A  con- 
cern dealing  in  any  specific  line  will  receive  many  letters 
from  debtors  exactly  similar  in  nature,  and  it  is  often 
possible  to  devise  form-letters  to  fit  a  number  of  pre- 
ponderating situations,  thus  saving  a  great  deal  of  time 
and  special  dictation. 

A  form-letter  represents  the  highest  degree  of  skill 
on  the  part  of  the  collection  department.  Such  letters  are 
built  up,  sentence  by  sentence,  some  of  them  being  the 
evolution  of  years  of  thought  and  experience,  and  it 
therefore  stands  to  reason  that  such  a  letter  will  be  much 
more  efficient  than  any  haphazard  impromptu  dictation 
of  the  correspondent. 

There  is  a  point  in  the  use  of  such  form-letters,  how- 
ever, beyond  which  it  is  unwise  to  go,  and  unless  a  careful 
watch  is  kept  there  will  be  a  tendency  to  include  too  large 
a  class  of  letters  under  the  head  which  a  certain  form- 
letter  is  designed  to  fit.  For  example,  a  form-letter  may 
be  used  in  eases  of  returned  unpaid  checks.  Checks  are 
returned  marked  "not  sufficient  funds,"  *'no  account," 
or  ''pajTnent  stopped."  These  three  reasons  present 
three  distinct  situations.  A  careless  but  well-meaning 
person  who  inadvertently  overdraws  his  account  should 
not  receive  the  same  letter  as  a  person  who  draws  a 
check  on  a  bank  in  which  he  has  no  account,  or  who 
deliberately  stops  payment  upon  a  check  after  having 


Special  Collection  Devices  255 

received  a  receipt.  The  person  who  has  inadvertently 
overdra^vn  his  account  will  respond  immediately  to  a 
courteous  letter,  whereas  the  other  two  will  require 
strenuous  and  drastic  treatment.  This  is  but  one  example 
of  many  situations  which  will  develop,  but  it  will  serve 
to  illustrate  the  possibility  of  abuse  of  the  form-letter. 

Another  useful  expedient  which  may  be  discussed  here, 
although  it  does  not  concern  the  form-letter  specifically, 
is  the  form-paragraph.  The  correspondent  will  naturally 
evolve  certain  set  phrases  and  sentences  which  he  will 
use  over  and  over  again.  He  will  build  these  up  into 
paragraphs  and  in  the  course  of  time  will  develop  a 
''repertoire"  of  a  hundred  or  more  such  paragraphs. 
These  paragraphs  represent  his  very  best  thought  and 
ability  and  he  has  found  them  to  be  productive  of  results. 
Therefore,  instead  of  dictating  them  into  his  letters  time 
after  time,  he  writes  them  out  carefully,  giving  each 
paragraph  a  number  or  letter.  Now  he  gets  a  letter 
asking  for  an  extension  of  time  on  account  of  illness. 
The  extension  is  to  be  granted,  but  at  the  same  time  the 
correspondent  wishes  to  impress  upon  the  debtor  the 
importance  of  resuming  his  payments  as  promptly  as 
possible,  the  policy  of  the  House  regarding  extensions, 
and  any  other  matters  that  may  be  pertinent.  He  has 
form-paragraphs  to  fit  everything  he  wishes  to  say. 
Therefore  he  will  dictate  perhaps  the  first  and  last  para- 
graphs of  his  letter  and  designate  the  numbers  of  the 
form-paragraphs  which  are  to  form  the  body,  the  result 
being  a  well-balanced  and  efiicient  letter. 

Care  must  be  exercised  in  the  construction  of  form- 
paragraphs  or  the  correspondent  will  gradually  evolve 
such  a  large  number  that  they  will  be  a  burden  to  him 
rather  than  a  help.  A  workable  index  is  likewise  essen- 
tial. 


256  Mail-Order  Instalment  Collections 

TEST  QUESTIONS 

1.  How  does  the  use  of  the  draft  in  instalment  collections 
differ  from  its  use  in  mercantile  accounts? 

2.  At  what  point  in  the  collection  of  instalment  accounts 
may  the  draft  he  used?    Why? 

3.  What  formalities  need  to  be  observed  to  insure  that 
banks  will  present  drafts  for  collecting  instalment  accounts? 

4.  What  are  the  three  legal  pitfalls  to  be  avoided  in  the 
instalment  collection  business? 

5.  At  what  stage  of  the  collection  procedure  are  the  services 
of  a  collection  agency  employed  ? 

6.  What  are  the  collection  methods  used  by  agencies?  Why 
are  agencies  often  more  effective  than  the  collector  of  the  instal- 
ment house? 

7.  What  are  the  advantages  and  limitations  in  the  use  of 
attorneys  for  collecting  delinquent  instalment  accounts? 

8.  Explain  the  importance  and  use  of  form-letters  in  this 
work. 


/ 


CHAPTER  V 

THE    MECHANICS    OF    THE   INSTALMENT 
COIil-ECTION   DEPARTMENT 

System  Required 

The  success  of  the  instahnent  collection  department 
will  depend  almost  wholly  upon  its  organization  as 
regards  the  routine  system  of  ''following  up"  accounts 
and  handling  the  records  of  the  department — that  is,  the 
methods  employed  to  insure  that  each  individual  account 
will  receive  the  proper  amount  of  attention  at  the  proper 
intervals,  and  that  no  chance  will  exist  whereby  any 
account  or  accounts  will  be  overlooked  or  slighted. 

The  efficient  collection  department  must  work  auto- 
matically up  to  the  point  where  the  debtor  either  pays 
or  furnishes  a  reason  for  nonpayment.  In  the  latter 
case  the  efficient  collection  department  ceases  to  be  auto- 
matic for  the  time  being  until  the  interpolated  situation 
is  adjusted  or  overcome.  The  automatic  system  must  be 
restored  with  the  least  possible  delay  after  such  an  inter- 
ruption however,  because  as  before  stated  only  15  per 
cent  of  accounts  are  paid  without  delinquency  at  some 
period.  Correspondence  of  a  special  nature  will  be 
created  by  practically  all  the  other  85  per  cent  of  ac- 
counts, and  if  they  cannot  be  promptly  replaced  in  the 
automatic  "follow-up,"  the  system  will  break  down. 

In  view  of  the  fact  that  many  collection  departments 
have  in  process  of  collection  as  many  as  two  or  three 
hundred  thousand  individual  accounts,  it  will  be  clear 

257 


258 


Mail-Order  Instalment  Collections 


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Mechanics  of  Instalment  Collection  Department    259 

that  the  system  must  be  not  only  automatic  but  simple, 
easily  operated  with  the  minimum  chance  of  error,  self- 
checking,  and  capable  of  unlimited  expansion.  A  system 
that  does  not  possess  these  qualities  will  not  only  prevent 
the  handling  of  accounts  efficiently  from  a  collection 
standpoint,  but  break  down  mechanically  of  its  own 
weight  if  expanded  beyond  certain  limits.  The  two  sys- 
tems most  in  use  are  the  loose-leaf  ledger  system  and 
the  card  system.  The  card  system  possesses  so  many 
advantages  over  the  loose-leaf  that  the  latter  will  be 
eliminated  from  consideration  in  this  article. 

The  Card  System 

In  the  card  system,  each  account  is  given  an  individual 
card,  ruled  and  subdivided  in  any  way  to  meet  the  partic- 
ular requirements  of  the  House.  A  typical  card,  which 
may  be  adopted  to  many  individual  circumstances,  is 
shown  in  Figure  1.  The  customer's  name,  address,  and 
all  data  regarding  him  will  be  shown  on  the  card,  together 
with  the  amount  of  his  account,  terms,  etc.  All  payments 
received  will  be  entered  on  the  card  in  the  same 
manner  as  in  a  ledger  account.  When  a  communication 
is  received  from  the  debtor,  the  card  is  attached  to  it 
before  it  is  referred  to  a  correspondent.  Ordinarily  a 
brief  recapitulation  of  all  special  correspondence  is  writ- 
ten on  the  reverse  side  of  the  card  by  the  correspondent, 
so  that  a  glance  will  tell  him  what  has  previously  been 
written  both  by  the  customer  and  by  the  House,  and 
give  him  a  general  idea  of  the  nature  of  any  special 
negotiations  that  may  be  under  way. 

The  Fh.ing  System 

There  are  two  methods  of  handling  accounts  with  cards 
—the  numerical  system  and  the  due  date  system.    As  the 


260  Mail-Order  Instalment  Collections 

limits  of  this  article  do  not  permit  of  an  extended  dis- 
cussion of  this  subject,  we  will  confine  ourselves  to  what 
is  considered  to  be  the  best  method,  i.  e.,  the  numerical 
system. 

Under  the  numerical  system  each  account  is  numbered 
and  filed  numerically  in  a  number  of  different  files ;  that 
is,  the  accounts  that  are  paying  promptly  each  due  date 
will  be  filed  in  the  ''billing  file."  Those  that  are  de- 
linquent up  to  a  certain  period  wall  be  filed  in  the  '  *  No.  1 
delinquent  file."  Those  that  have  passed  the  stage  of 
mere  delinquency  will  be  filed  in  the  "No.  2  delinquent 
file,"  or  perhaps  the  ''attorney  file,"  or  whatever  the 
different  stages  are  called. 

The  Follow-up  Mechanism 

We  will  assume  that  our  accounts  are  to  receive  atten- 
tion every  ten  days.  A  customer's  card  will  show  that 
his  payments  are  due  on  the  fifth  of  the  month.  His  is 
then  what  is  called  a  "five  card."  Shortly  before  the 
fifth  of  each  month  all  the  "five  cards"  are  taken  from 
the  billing  file  and  bills  sent  out  on  them,  and  they  are 
then  replaced  in  their  numerical  order.  On  the  twelfth 
of  the  month,  the  billing  clerk  will  take  out  all  the  "five 
cards"  not  showing  pajTnents  and  a  second  bill  will  be 
sent  and  the  cards  replaced  as  before,  the  idea  being 
that  the  first  bill  will  reach  the  debtor  in  plenty  of  time 
to  allow  him  to  get  his  pajnnent  in  by  the  fifth,  and  the 
second  bill  before  the  account  becomes  more  than  ten 
days  delinquent.  The  day  after  these  '  *  five  cards ' '  have 
received  attention  the  clerk  is  not  interested  in  them  when 
going  through  the  files;  he  is  now  interested  in  "six 
cards";  on  the  day  after  in  "seven  cards";  and  so  on, 
until  he  completes  his  cycle  of  ten  and  is  back  to  the 
"fives"  again. 


Mechanics  of  Instalment  Collection  Department    261 

It  is  now  approximately  the  twenty-fifth  of  the  month, 
and  no  payment  has  been  received  on  our  "five  card." 
It  is  again  taken  out  and  a  ''first  letter"  is  sent  out,  the 
key  number  of  the  letter  and  the  date  sent  being  entered 
on  the  card.  It  is  not  replaced  in  the  billing  file,  however. 
It  is  now  a  delinquent  account  and  is  filed  in  the  delin- 
quent file  in  numerical  order,  where  it  is  taken  out  on 
every  "five  date,"  that  is,  on  the  fifth,  fifteenth,  and 
twenty-fifth  of  each  month,  and  given  attention,  every 
letter  sent  being  entered  on  the  card  together  with  the 
date  of  mailing,  so  that  each  card  will  present  a  complete 
history  of  all  efforts  to  collect.  If  the  form-letters  used 
are  progressive  and  so  keyed,  there  will  be  no  doubt  as 
to  what  letter  should  be  sent  and  the  system  thus  becomes 
perfectly  automatic,  with  no  chance  for  error.  If  a  pay- 
ment is  received  on  the  "five  card"  in  response  to  the 
bills,  the  payment  is  entered  in  the  proper  place  and  the 
card  replaced.  In  going  through  the  billing  file  on  the 
fifteenth  and  twenty-fifth  of  the  month  the  clerk  will  see 
at  a  glance  that  the  account  is  paid  for  that  month  and 
the  card  is  not  withdrawn  until  the  next  fifth,  when  it 
receives  another  bill. 

If  a  payment  is  received  on  an  account  in  the  delinquent 
file  bringing  it  "  up  to  date, "  it  is  of  course  then  replaced 
in  the  billing  file,  or  as  a  result  of  special  correspondence 
an  account  may  arbitrarily  be  replaced  in  good  standing, 
the  delinquency  being  disregarded.  In  this  case  the 
spaces  provided  for  the  payments  that  have  not  been 
made  are  crossed  off  r.p  to  the  next  due  date,  and  the 
card  replaced  in  the  billing  file,  where  it  will  be  with- 
drawn and  billed  at  the  proper  time.  The  same  procedure 
is  followed  if  an  extension  is  granted.  Suppose  there  is 
an  extension  from  May  until  August.  The  spaces  wherein 
the  payments  for  June  and  July  would  be  entered  are 


262  Mail-Order  Instalment  Collections 

crossed  off  and  the  card  will  then  remain  dormant  in  the 
billing  file  until  the  August  due  date,  when  it  ^^dll  be  taken 
out  and  a  bill  sent. 

Inasmuch  as  the  cards  are  filed  numerically,  a  supple- 
mentary alphabetical  file  will  be  required  in  order  to 
make  it  possible  to  find  any  given  card  when  it  is  needed 
for  special  correspondence  or  to  enter  payments.  This 
is  a  "dead"  or  dormant  file  and  is  used  merely  to  ascer- 
tain the  account  number  of  an  account.  If  Frank  Jones 
writes  regarding  his  account,  the  alphabetical  file  will 
disclose  that  his  account  number  is  87,658.  It  is  then 
necessary  to  look  in  all  the  numerical  files  in  order  to  find 
his  account  card,  as  there  is  no  way  of  telling  whether  it 
is  in  the  billing  file  or  in  any  of  the  delinquent  files, 
unless  his  letter  furnishes  a  clue.  The  fact  that  these 
are  all  numerical  and  hardly  ever  over  three  in  number, 
however,  renders  the  task  an  easy  one,  and  the  card  can 
be  picked  out  with  practically  no  delay. 

Where  there  are  several  hundred  thousand  individual 
accounts,  alphabetical  filing  becomes  a  formidable  task, 
whereas  numerical  filing  presents  no  difficulties  what- 
ever; there  is  just  one  place  for  a  certain  number.  If 
Jones'  number  is  87,658,  and  his  card  belongs  in  the 
delinquent  file,  we  know  that  his  card  belongs  between 
the  next  lower  and  next  higher  numbers  in  that  file  and 
nowhere  else,  whereas  if  we  are  filing  alphabetically  we 
shall  have  to  stop  to  think  whether  he  goes  before  or 
after  Fred  A.  Jones  or  Freda  B.  Jones.  The  active  cards 
are  taken  from  the  files  at  least  once  each  month  and 
must  be  refiled,  but  the  index  cards  which  are  filed  alpha- 
betically are  never  removed,  and  so  no  difficulty  arises. 

This  brief  exposition  of  the  numerical  system  is  not 
intended  to  cover  the  subject  in  anything  like  a  complete 
manner,  but  rather  to  furnish  the  basis  upon  which  a 


Mechanics  of  Instalment  Collection  Department    263 

system  may  be  built  to  fit  the  needs  of  any  particular 
business.  If  the  foundation  is  right,  the  superstructure 
will  stand,  no  matter  how  high  we  build.  It  is  therefore 
important  that  we  start  rightly,  because  in  this  great 
land  of  unlimited  opportunity,  where  hundred-million 
dollar  mail-order  businesses  are  built  within  a  decade, 
there  is  no  telling  what  may  happen,  no  matter  how 
modest  a  business  may  be  at  the  start. 

TEST  QUESTIONS 

1.  Why  is  system  an  important  consideration  in  the  han- 
dling of  mail-order  instalment  accounts? 

2.  What   advantages   has   a    card   system   over   any   other 
system  ? 

3.  What  points  are  to  be  considered  by  the  instalment  col- 
lector in  choosing  a  filing  system? 

4.  Explain  how  a  follow-up  system  may  be  planned  so  as 
to  apportion  the  work  evenly  over  all  the  days  of  the  month. 

5.  How  is  a  record  kept  on  the  cards  of  all  correspondence 
with  individual  debtors? 

6.  How  is  the  instalment  card  of  a  customer  handled  when 
a  payment  has  been  made  ? 

7.  What  are  the  advantages  of  a  numerical  filing  system  for 
this  kind  of  work? 


INDEX 


Ability  as  an  element  in  credit,  2,  49- 

50,  66-67. 
Abusive  letters,  232-34. 
Accounts.     See  Collections. 
Agencies  :  collection.  29-30,  191-97,  246- 

48  ;  commercial,  15-22,  99. 
Associations,  credit,  30-35. 
Attitude  of  collector,  114,  165. 
Attorneys.       See     Law,     recourse    to ; 

Lawyers. 

Bad  accounts,  152. 

Bankruptcy.     See  Law,  recourse  to. 

Banks  as  sources  of  credit  information, 

22-23,  41. 
Basis  for  debt,  122-24. 
Blackmail,   244-46. 
Blank  for  credit  Inquiry,  24-26. 
Bookkeeping    department,    co-operation 

of,  with  credit  department,  55-57. 
Bradstreet.     See  Agencies. 
Business  expense  debts,   123. 
Business  man's  account.   230-31. 
Business  statement,  analysis  of,  67-78. 

Calls,   personal,  173-76. 

Capital  as  an  element  in  credit,  5,  49- 
50,  67-74. 

Capital   outlay   debts,    123-24. 

Card  record  of  collections,  258-63. 

Cards,  credit,  85-86. 

Careless  debtors,   113. 

Causes  of  failures,  79-81. 

Character  as  an  element  In  credit,  2, 
49-50,  65-66. 

Checks,  231,  254-55. 

City  "skips,"  223-24. 

Classification  of  accounts,  148-52. 

Collateral,   135-36. 

Collections :  abusive  letters,  232-34 ; 
agencies,  191-97,  246-48 :  atti- 
tude of  collector,  114,,  165;  bad 
accounts,  152 ;  basis  for  the  debt, 
122-24  ;  blackmail,  244-46  ;  business 
man's  account,  230-31  ;  card  record 
of,  259-63 ;  careless  debtors,  113 ; 
checks,  231,  254-55  ;  classification  of 
accounts,  148-52  ;  collector,  attitude 
of,  114,  165 ;  collector's  qualifica- 
tions, 114;  collector's  task.  112-13; 
commercial  accounts,  147-52  ;  condi- 
tion, financial,  of  debtor,  112-13,  144- 
46  ;  co-operation  of  salesmen  wltli  col- 
lection department,  176-78  ;  co-opera- 
tive, 183-86:  correspondence,  first 
steps  in,  163-64,  168 ;  creditors, 
rights  of,  140-42  ;  daily  routine,  l.")8- 
60 ;  decoy  letters.  220-26 ;  diflicnlt 
accounts,  150-52  ;  discount  accounts. 
148-49  ;  dishonest  debtors,  113  :  dis- 
tant creditor,  213-14  :  drafts.  160-64. 
166,  242-44  ;  environment  of  debtor, 
143-46;  extensions,  138,  214-15,  234- 
37 ;    financial    condition    of    debtor. 


207  ;    follow-up    mechanism,    260-63  , 
form-letters,    251-55,    261 ;    form    of 
the    debt,    128-38 ;    good    Intentions. 
240-41  ;  human  element  in,  114,  199 
201,   200-7,    213;   Inducements,    180 
law,  recourse  to,  171-72,  187-90,  218 
19,    248-51  ;    legal    pitfalls,    244-46 
libel,    244-46;    lost    debtors,    219-26 
mall-order      instalment      collections 
202-63 ;   mechanics   of,   257-63 ;    mis 
fortune  as  a  reason  for  non-payment 
212-14,  236-37  ;  modifications  In  col 
lector's  demands,   140-42  ;   nature  of, 
111-12  ;   necessities,   an   account   for 
226-28 ;    postal    regulations.    244-46 
prompt-payment  accounts,  150  ;  psy 
chology    of,    117-20;    psychology    ol 
the  debtor,  205-6,  208-9,  232-41,  247 
48 ;    relation    to    other    departments 
114-15 ;      retail      accounts,      178-80 
rights  of  cre^iltors,   140-42  ;  seasons. 
144  ;   sight  dfafts,   160-64  ;   slow-pay 
accounts,     150-52.      154-65,     215-19" 
statements.  155,  166,  167  ;  telegrams 
160-62;  tickler,   155-00;   tricks,   180 
81  ;      wholesale     accounts,      147-78 1 
woman's  account,  228-30  ;  writing  to 
the  chief,  238-39. 

Collector.     See  Collections. 

Commercial   accounts,   147-52. 

Commercial  paper  brokers  as  sources 
of  credit  Information,  23-24. 

Condition,  financial,  of  debtor,  112-13, 
144-40,  183,  207,  210-11. 

Co-operative  collections,  183-86. 

Correspondence.     See  Collections. 

Correspondence  files,  158. 

Credit :  ability  as  an  element  in,  2,  66- 
67 ;  banking,  7 ;  capital  as  an  ele- 
ment in,  5,  67-74  ;  character  as  an 
element  in,  2,  65-66 ;  credit  cards, 
85-86 ;  credit  files,  51-57,  94-104  ; 
credit  man,  qualifications  of,  9-14 ; 
definition  of,  1-8  ;  economic  elements 
In.  S2-S3 ;  handling  credit  informa- 
tion, 46-57,  97-101  ;  Illustration  of 
actual  procedure,  88-105 ;  Invest- 
ment, 7  ;  legal  considerations,  83-84  ; 
mail-order  instalment  credits,  204-5  ; 
mercantile   credit,    1-8 ;   personal,   7 ; 

f>romptness  of  payment  an  element 
n,  84-85;  public,  7;  rating,  17-18; 
relation  of,  to  other  departments, 
55-57,  115  ;  sales  and  expense  as  an 
element  In,  74-78  ;  sources  of  infor- 
mation, 15-44  ;  special  reports,  18- 
20 ;   work  of  credit  man,   107-10. 

Credit  Clearing  House,  30-33. 

Credit  man  :  his  trips  of  investigation, 
39-41  ;  how  his  decisions  are  made, 
148  :  qualifications  of,  9-14  ;  should 
have  supervision  of  collections,  115; 
wo  ■•'5     i.  107-10. 


265 


266 


Index 


Creditors.     See  Collections. 
Customers   as    sources   of   credit   Infor- 
mation. 39-44. 

Debt.     Bee  Collections. 
Debtor.     See  Collections. 
Decoy   letters,    220-26. 
Delinquency.     See  Collections. 
Devices,  special,  in  collections,   242-55. 

See  also  Collections. 
Difficult  accounts,  150-52. 
Discount  accounts,  148-49. 
Dislionest  debtor,  113. 
Distant  creditor,  213-14. 
Drafts,    160-64,    166.   223,   242-44. 
Dun.     See  Agencies. 

Economic  elements  in  credit,  S2-83. 
Environment  of   debtor,   143-46. 
Equipment  debts,   123. 
Extensions.  138,   214-15,  234-37. 

Failures,   statistics  of,   79-81. 
Federal  reserve  banks.  83. 
Files.     See  Collections  ;  Credit. 
Filing  of  collection   record  cards,   259- 

63. 
Financial   condition   of  debtor,   112-13, 

144-46,  183,  207,  210-11. 
Financial  manuals  as  sources  of  credit 

information,   38-39. 
Follow-up    mechanism,    260-63. 
Foreclosure  on   collateral,   136. 
Form-letters,  251-55,  261. 
Form-paragraphs,    255. 
Form   of   debt,   128-38. 

Guarantee,   129-33. 

Handling    credit     information.     46-57. 

97-101. 
Human  element  in  collections,  114,  199- 

201,   206-7.  213. 
Human  element  in  credit,  11-12. 

Illustration  of  actual  credit  procedure, 

88-105. 
Inducements   in    collections,    180. 
Inquiries  from  customers,  89-92. 
Invoices,  128. 

Law.  recourse  to,  171-72,  183-86,  187- 
90,  218-19,  248-51. 

Lawyers  as  collection  agents.  See 
Law,   recourse  to. 

Lawyers  as  sources  of  credit  informa- 
tion, 26-29. 

Legal  considerations,  83-84,  244-46. 

Legal  pitfalls,   244-46. 

Letters  of  inquiry  on  credit,  24. 

Libel,    244-46. 

Local  business  houses  as  sources  of 
credit  information.  24-26. 

"Ixjcating"    debtors.    219-26. 

Ivost  debtors,  219-26. 

Mall-order  instalment  accounts,  202-63. 
Mechanics  of  collection   (mail-order  in- 
stalment),  257-63. 
Mercantile  agencies,    L5-22. 
Mercantile  credit.     See  Credit. 
Merchandise  debts,  122-23. 


Misfortune  as  a  reason  for  non-pay- 
ment. 212-14,  236-37. 

Modifications  in  collector's  demands, 
140-42. 

Mortgage,  132,  136-38. 

National  Association  of  Credit  Men,  31- 

35. 
National  Bankruptcy  Act,    187-89. 
Nature  of  collections.    111-12. 
Necessities  :  account  for,  226-28. 
Notes,  131-38. 

Open  accounts,  128-32. 

Periodicals  as  sources  of  credit  infor- 
mation, 39. 

Personal  adjustment  services,  195-97. 

Personal  expense  debts,  123. 

Personal  security,  134-35. 

Pitfalls,   legal,   244-46.        - 

Postal  regulations,  244-46. 

Promptness  of  payment  an  element  In 
credit,  84-85. 

Prompt-payment    accounts,    150. 

Psychology  of  the  collector,  118-20. 

Psychology  of  the  debtor,  117-20,  205- 
6.   208-9,   232-41.  247-48. 

"Puncher  drafts,"  223. 

Qualifications  of  a  collector,   114. 

Rating,    17-18. 

"Regular"'    terms,    126. 

Reporters  for   mercantile   agencies.   18- 

19. 
Reports,  special,  on  credit,  18-20. 
Retail  accounts  :   collection  of,   178-80  ; 

terms    of  sale,    63-64  ;    turnover,    75- 

78. 
Rights  of  creditors,  140-42. 

Sales  and  expense  as  elements  in  credit, 
74-78. 

Salesmen :  as  sources  of  credit  infor- 
mation, 35-38  ;  co-operation  of,  with 
collection    department,    176-78. 

Seasons,   144. 

Secured  accounts,   129-38. 

Sight  drafts,   160-64. 

Signed  statement  from  prospective  cus- 
tomer, 42-44,  93,  98. 

"Skips,"   219-26. 

Slow-pay  accounts,  150-52.  154-65,  215- 
19. 

Sources  of  credit  information,  15-44, 
48. 

Special  credit  reports,  18-20. 

Statements,   155,   166,   167. 

Statement,  signed^  from  prospective 
customer,   42-44. 

Statute  of  limitations,  189. 

Telegrams,   170-72. 

Terms,  58-64,  101-3,  125-27. 

"Tickets"    for   rating,    18-19. 

Tickler.  155-60. 

Trade    discounts :    importance    of,    59 ; 

terms,    5-8 ;    time    allowed,    59-65. 
Tricks  in  collecting.   180-81. 
Turnover  of  retail   stocks,  75-78. 

Wholesale    accounts,    147-78. 
Woman's  account,   228-30. 


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